PLEASE SOLVE IT!

Consider a company that has funding of 30% debt, 65% ordinary shares and 5% preference shares, a cost of debt (before tax) of 2.5%, a cost of ordinary shares of 9%, a cost of preference shares of 8.5% and a tax rate of 30%.

(a) Calculate the weighted average cost of capital (WACC) for this company. (2 marks)

(b) We can use WACC to calculate company value. Briefly explain what would (probably) happen to company value if we increased the financial leverage of this company. (2 marks)

(Include enough working to show you understand the calculations.)