Question: Question 3: Capital Structure a. Illustrate graphically how leverage impacts the cost of equity, cost of debt, and WACC under Modigliani & Miller's two propositions.

Question 3: Capital Structure a. Illustrate graphically how leverage impacts the cost of equity, cost of debt, and WACC under Modigliani \& Miller's two propositions. Consider both a situation without and with corporate taxes. Explain. Dabney Electronics currently has no debt. Its operating income is $20 million and its tax rate is 40 percent. It pays out all of its net income as dividends and has a zero growth rate. The current stock price is $40 per share, and it has 2.5 million shares of stock outstanding. If it moves to a capital structure that has 40 percent debt and 60 percent equity (based on market values), its investment bankers believe its weighted average cost of capital would be 10 percent. b. What would its stock price be if it changes to the new capital structure

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