Ermo Publishing's tax rate is 40%, its beta is 1.00, and it uses no debt. However, the CFO is considering taking on debt which will lead to a beta of 1. If the risk-free rate is 5.0% and the market risk premium is 6.0%, by how much would the capital structure shift increase the firm's cost of equity? [Hint: Find r, with no debt, and r, with debt, and find the difference]
Select one:
a. 2.28%
b. 2.05%
c. 1.53%
d. 1.70%
e. 2.20%