Problem
Certiz Enterprises is considered a major recapitalization. The firm currently has a market value of $ 1billion, a debt to capital ratio of 10%, a beta of 0.90 and a pre-tax cost of borrowing of 7%. It is considering tripling its debt to capital ratio to 30% and it believes that doing so will increase its firm value by 15%. The firm has a tax rate of 40%, the riskfree rate is 6% and the market risk premium is 4%. What will the cost of debt have to be at the 30% debt to capital ratio for firm value to increase by 15%.