Wentworth Industries is 100 percent equity financed. Its current beta is 0.9. The expected market rate of return is 14 percent and the risk-free rate is 8 percent.
a. Calculate Wentworth's cost of equity.
b. If Wentworth changes its capital structure to 30 percent debt, it estimates that its beta will increase to 1.1. The after-tax cost of debt will be 7 percent. Should Wentworth make the capital structure change?