Dyson Inc. currently finances with 20.0% debt (i.e., wd = 20%), but its new CFO is considering changing the capital structure so wd = 36.0% 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, rRF5.00% Tax rate, T40%Market risk prem, RPM6.00% Current wd20%Current beta, bL11.65 Target wd36.0%?
A. 1.61%
B. 1.66%
C. 1.24%
D. 1.68%
E. 1.69%
Answer: A
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