Proteak, Inc, needs to gather 109 million dollars for a new investment project. If the company issues one-year debt, it may have to pay an interest rate of 10%, although Proteak's administrators believe that 8% would be a fair rate given the level of risk. However, if the company issues shares, the managers believe that these could be undervalued by 5%

a) What is the cost to current shareholders of financing the project with retained earnings, debt and equity?

b) Determine financial preferences for shareholders and provide conclusions, based on the Pecking Order Theory (Myers and Majluf)