Dye Industries Currently Uses No Debt, but Its New CFO

Multiple Choice

Dye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 40.0% debt (wd) by issuing bonds and using the proceeds to repurchase and retire 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?

A) 1.66%
B) 1.84%
C) 2.02%
D) 2.23%
E) 2.45%