Dyson Inc. currently finances with 20.0% debt (i.e., wd = 20%), but its new CFO...
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Dyson Inc. currently finances with 20.0% debt (i.e., wd = 20%), but its new CFO is considering changing the capital structure so wd = 40.5% by issuing additional bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 - wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity? Do not round your intermediate calculations (Hint: You must unlever the current beta and then use the unlevered beta to solve the problem.)
| Risk-free rate, rRF | 5.00% | Tax Rate, T | 40% |
| Market risk prem, RPM | 6.00% | Current Wd | 20% |
| Current beta, bL1 | 1.70 | Target Wd | 40.5% |
a. 2.13%
b. 1.74%
c. 2.29%
d. 2.15%
e.2.84%
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