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

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%