Lauterbach Corporation Uses No Debt, Its Beta Is 1

Multiple Choice

Lauterbach Corporation uses no debt, its beta is 1.10, and its tax rate is 40%. However, the CFO is considering moving to a capital structure with 30% debt and 70% equity. If the risk-free rate is 5.0% and the market risk premium is 6.0%, by how much would the capital structure shift change the firm's cost of equity?

A) 1.53%
B) 1.70%
C) 1.87%
D) 2.05%
E) 2.26%