Simon Software Co. currently has a capital structure that consists of 20 percent debt and 80 percent equity. (Its D/E ratio is 0.25.) The risk-free rate is 6 percent and the market risk premium, Rm - Rrf, is 5 percent. Currently the company's cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. What would be Simon's estimated cost of equity if it were to change its capital structure to 50 percent debt and 50 percent equity? (Hint: Use the Hamada equations.)

14.35%

30.00%

14.72%

15.60%

13.64%