1.

a. You have estimated the after-tax cost of debt to be 5.4%, the cost of preferred to be 6.7%, and the cost of common to be 8.6%. Your firm obtains 30% of its financing from long-term debt, 20% of its financing from preferred stock, and 50% of its financing from a common stock. Calculate the firms cost of capital.

b. Since debt is the cheapest source of financing for the firm, all firms should obtain 99% of their financing from debt and only 1% from equity. True or false and explain your answer. Hint review the material on capital structure before attempting to answer.