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. 1 mark.

2. Justify Mr Very Smarts advice to the Board of Smart Ltd. 3 marks.