Dye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 49.0% debt (wd) by issuing bonds and using the proceeds to repurchase and retire some 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, i.e., what is rL - rU? Do not round your intermediate calculations. Risk-free rate, rRF6.00% Tax rate, T40% Market risk prem, RPM3.00% Current wd0% Current beta, bU1.30 Target wd49.0% ?
A. 2.59%
B. 1.91%
C. 2.92%
D. 1.57%
E. 2.25%
Answer: E
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