MedChem Has a Capital Structure of 60% Equity and 40

MedChem has a capital structure of 60% equity and 40% debt and a current beta of 1.2. MedChem is considering an investment project in a new line of business that has an expected internal rate of return of 16%. The typical firm already in the line of business that MedChem is considering expanding into has a beta of 1.5 and a capital structure that has 55% debt and 45% equity. The marginal tax rate for all these firms, including MedChem, is 40%. If the current risk-free rate is 7% and the expected market risk premium is 8%, should MedChem expand into the new line? Assume that MedChem will retain its current capital structure.

A) expand if after-tax cost of debt is 11.5% or less
B) expand if after-tax cost of debt is 15% or less
C) expand if after-tax cost of debt is 10.4% or less
D) do not expand