Question: A firm has zero debt in its capital structure. Its overall cost of capital is 8%. The firm is considering a new capital structure with

A firm has zero debt in its capital structure. Its overall cost of capital is 8%. The firm is considering a new capital structure with 50% debt. The interest rate on the debt would be 5%. Assuming that the corporate tax rate is 40%, and all else is equal. including its risk profile, what would be its new cost of equity?

Select one:

a. 3.0%

b. 6.0%

c. 8.0%

d. 2.0%

e. None of these.

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