Johnson's Popcorn Enterprises is unlevered and is valued at $835,000. Johnson's has decided that including debt in its capital structure would increase its value. Prior to including debt, the cost of equity is 7.5%.
Johnson's has determined that issuing $235,000 of new debt at a 4.2% interest rate would be optimal. Johnson's would repurchase $235,000 of stock with the proceeds from the debt issue. Johnson's has a marginal tax rate of 38%. What will Johnson's new WACC be? Assume the attributes of MM Proposition II (with taxes) are at play.