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Suppose we have a levered firm with three types of securities: perpetual debt, common stock and preferred stock. Currently the ratio of common stock value to assets is 0.4 and the ratio of preffered stock value to assets is 0.3. Suppost that 60% of preferred dividends can be written off as expenses.(just like perpetual debt). The company would like to decrease the ratio of common stock value to assets to 0.2, keeping the preferred stock ratio at 0.3. The company currently borrows at the risk-free rate of interest 2% and that will be unaffected by this change in capital structure. Historically the correlation of the company's rate of return with the market has been 0.6. The ratio of the variance of the market return relative to the variance of the company's return has been 0.8. The expected return on the market next year is 10% and the corporate tax rate is 50%. (11 (1) What is the company's current B? What is the company's current weighted average cost of capital? (111) What is the new weighted average cost of capital under the new capital structure? (iv) Consider a project with an expected return of 4.5% and which is 25% riskier than the company's average operations. Under the old capital structure would this project have been accepted? What about under the new capital structure

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