Problem
DDD is an unlevered firm with a cost of capital of 16.9%. The company is considering adding debt to its capital structure to reduce equity. Specifically, the company is evaluating the consequences of adding $7 million in perpetual debt at a pre-tax cost of 4.7%. The firm expects to generate EBIT of $8 million every year into perpetuity. Assume interest expense is tax deductible. The firm pays a tax rate of 29%. Ignore financial distress costs.
Based on MM Prop II, what will be DDD's weighted average cost of capital if it takes on the debt?