Moscow Co has in issue $50$ million shares of $$1\mathrm{.}00$ nominal value per share which are cumrently trading at $$3\mathrm{.}50$ per share. Its dividend has grown steadily from $$0\mathrm{.}20$ per share five years ago to today's $$0\mathrm{.}23$ per share, which has just been paid. Investors expect this rate of growth to continue.

Mosoow Co also has in issue $6\%$ convertible loan notes with a total nominal value of $$80m.$ These loan notes are convertible into $28$ ordinary shares of Moscow Co in four years' time. If not converted, the loan notes will be redeemed on the same future date at their nominal value of $$100$ per loan note. Each $$100$ loan note is currently trading at $$105.$ Investors expect Moscow Co's ordinary share price to grow at the same historical annual rate as its dividends over the next four years.

The company also has a long$-$term loan of $$100m$ at a fixed interest rate of $8\%$ per year.

The corporation tax rate is $20\%$ and tax is paid in the year that profits are earned.

$($b$)$ Discuss whether the change in capital structure following conversion of the loan notes in four years' time will increase or decrease Moscow Co's weighted average cost of capital.

$(9$ marks

$120$ marl