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Smart Ltd has the following balance sheet structure: Assets Liabilities and Equity Assets $1000 Debt $300 Equity $700 Total $1000 $1000 Smart Ltds debtholders require

Smart Ltd has the following balance sheet structure:

Assets

Liabilities and Equity

Assets

$1000

Debt

$300

Equity

$700

Total

$1000

$1000

Smart Ltds debtholders require a return of 9% and shareholders require a return of 11%. Ignore tax rates.

Mr Very Smart, the CEO of Smart Ltd tells the Board of Smart Ltd that shareholders require a very high return, its cheaper to use debt to fund our projects. We should therefore raise debt and reduce our equity holdings. This will increase our returns.

Required:

1. Calculate the weighted average cost of capital for Smart Ltd.

2. Justify Mr Very Smarts advice to the Board of Smart Ltd.

please answer in 10minutes

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