1) The new beta will be approximated by looking at other firms in the industry. Since we can estimate a projected debt-equity ratio, we will set our beta equal to that of another company that currently has our projected debt-equity ratio. In this case, it is Sprint.
2) Cost of debt will increase with additional debt. Given the current capital market conditions, we will assume that our rate will go up, but not by too much. In this case, the assumption is that our interest rate will increase from 6.10% to the rate available to a current AA1 rated firm, or 6.160%.
With these assumptions, and using the same methodology used in the initial WACC computation, we determine that the new WACC resulting from the additional debt and new capital structure is .356. In order to go before the Board of Directors of MCI and make a recommendation on the issuance of new debt to repurchase the company's stock, we must first do some homework. The Board of Directors were considering this change to enhance shareholders value as well as sending a strong message to the market about MCI's bright future. To select the best option for MCI, we first need a clear separation between MCI's equity and debt.