The Modigliani-Miller theorem assumes that the firm has only two classes of securities, perpetual debt and equity. Suppose that the firm has issued a third class of securities-preferred stock-and that X% of preferred dividends may be written off as an expense (0 < X < 1).
(a) What is the appropriate expression for the value of the levered firm?
(b) What is the appropriate expression for the weighted average cost of capital?