Assuming Zero Non$-$Equity Betas: For each part of the problem, measure the equity beta, equity cost of capital, and weighted average cost of capital under the assumptions that interest is tax deductible and that $($i$)$ the discount rate for interest tax shields is the unlevered cost of capital, $($ii$)$ the discount rate for interest tax shields is the debt cost of capital, and $($iii$)$ the company refinances itself annually to a target capital structure $($use the debt cost of capital for the first year and the unlevered cost of capital for subsequent years$).$

a$.$ Assume non$-$equity betas are equal to the betas implied by the cost of capital stated for each security.

b$.$ Assume non$-$equity betas are equal to zero and use the debt and preferred stock costs of capital stated in the problem to measure the weighted average cost of capital. What violations of standard corporate finance theory do you observe?

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