Targaryen Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent.

a. The company president has approached you about the companys capital structure. He wants to know why the company doesnt use more preferred stock financing because it costs less than debt. What would you tell the president?