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Answer (C) is correct . The important consideration is whether the overall cost of capital will be lower for a given proposal. According to the Capital Asset Pricing Model, the change will result in a lower average cost of capital. For the existing structure, the cost of equity capital is 15.5% [6% + .95 (16% – 6%)]. Because the company has no debt, the average cost of capital is also 15.5%. Under the proposal, the cost of equity capital is 16.5% [6% + 1.05 (16% – 6%)], and the weighted average cost of capital is 13.8% [.3(.075) + .7(.165)]. Hence, the proposal of 13.8% should be accepted.

Answer (A) is incorrect because The average cost of capital needs to be considered.
Answer (B) is incorrect because The average cost of capital needs to be considered.
Answer (D) is incorrect because The weighted average cost of capital will decrease.