Pumpkin Patch Corp. $($PPC$)$ has no debt and an unlevered cost of capital of $12\%.$ PPC decides

to increase its leverage to reach a debt$-$to$-$equity ratio of $0\mathrm{.}50.$ The pre$-$tax cost of debt is

$8\mathrm{.}5\%$ and corporate taxes are $40\%.$ How much will WACC be changed by adding debt to the

capital structure? $($Assume perfect capital markets with taxes.$)$ Answer is B$.$

A$)$ WACC will increase by $1\mathrm{.}13\%$

B$)$ WACC will decrease by $1\mathrm{.}13\%$

C$)$ WACC will increase by $1\mathrm{.}7\%$

D$)$ WACC will decrease by $1\mathrm{.}7\%$

E$)$ WACC will not change since capital structure is irrelevant.