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DDD is an unlevered firm with a cost of capital of 11.6%. The company is considering...

DDD is an unlevered firm with a cost of capital of 11.6%. The company is considering adding debt to its capital structure to reduce equity. Specifically, the company is evaluating the consequences of adding $6 million in perpetual debt at a pre-tax cost of 5.3%. The firm expects to generate EBIT of $5 million every year into perpetuity. Assume interest expense is tax deductible. The firm pays a tax rate of 38%. 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?

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