DDD is an unlevered firm with a cost of capita of 10.7%. The company is considering adding debt to its capital structure to reduce equity. Specifically, the company is evaluating the consequences of adding $4 million in perpetual debt at a pre-tax cost of 5.1%. The firm expects to generate EBIT of $10 million every year into perpetuity. Assume interest expense is tax deductible. The firm pays a tax rate of 35%. 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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Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.