Dye Industries Currently Uses No Debt,but Its New CFO Is

question 39

Multiple Choice

Dye Industries currently uses no debt,but its new CFO is considering changing the capital structure to 49.0% debt (w_d) by issuing bonds and using the proceeds to repurchase and retire some common shares so the percentage of common equity in the capital structure (w_c) = 1 - w_d.Given the data shown below,by how much would this recapitalization change the firm's cost of equity,i.e. ,what is r_L - r_U? Do not round your intermediate calculations. $\begin{array}{lrlr}\text { Risk-free rate, } \mathrm{rFF} & 6.00 \% & \text { Tax rate, } \mathrm{T} & 40 \% \\\text { Market risk prem, RPM } & 3.00 \% & \text { Current } \mathrm{w}_{\mathrm{d}} & 0 \% \\\text { Current beta, bu } & 1.30 & \text { Target } \mathrm{w}_{\mathrm{d}} & 49.0 \%\end{array}$
?

• A) 2.59%
• B) 1.91%
• C) 2.92%
• D) 1.57%
• E) 2.25%

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