1. (4 Points) A firm has debt, equity and preferred stocks. Assume the Modigliani Miller assumptions...

 

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1. (4 Points) A firm has debt, equity and preferred stocks. Assume the Modigliani Miller assumptions hold true and there is no taxation. Use the following data: Required Returns Weights Debt RD = 10% Debt 0.30 Equity RE = 14% Equity 0.60 Preferred Stock Rp = 9% Preferred Stock 0.10 (a) Estimate the weighted average cost of capital (WACC). (b) What happens to the WACC. when the debt ratio increases? 1. (4 Points) A firm has debt, equity and preferred stocks. Assume the Modigliani Miller assumptions hold true and there is no taxation. Use the following data: Required Returns Weights Debt RD = 10% Debt 0.30 Equity RE = 14% Equity 0.60 Preferred Stock Rp = 9% Preferred Stock 0.10 (a) Estimate the weighted average cost of capital (WACC). (b) What happens to the WACC. when the debt ratio increases?