Question 4 (6 marks) Girard Manufacturing Ltd. (GML) has historically operated with NO long-term debt in its capital structure. The cost of GML's equity is currently 10%. GML's financial advisor has suggested raising debt in order to change its capital structure to 70% equity and 30% debt, and use the funds to buy back a portion of its equity. The financial advisor has estimated that a debt issue would require an annual yield of 5.5%. The after-tax flotation cost of issuing new debt is 3%. The financial advisor also expects that the cost of GML's equity with the new capital structure will increase to 11%. GML is subject to tax at a rate of 40%. Required: a) Calculate GML's new weighted average cost of capital if it changes its capital structure to that suggested by the financial advisor. (2 marks) b) Explain whether GML should change its structure. (1 mark) c) Explain why firms generally desire a lower weighted average cost of capital. (1 mark) d) Describe two disadvantages of adding debt to a firm's capital structure. (2 marks) Copyright 2020 Chartered Professional Accountants of Canada. All rights reserved. (CONTINUED ON PAGE 3)