The capital structure for ECO is 40% debt, 10% preferred stock, 50% common stock equity. Tax 30%

Eco current debt is a loan at 8% stated interest rate.

Ecos preferred stock pays a 9% dividend and has a $100-per-share par value.

Eco does not currently pay a dividend to common stockholders.

In order to track the cost of common stock the CFO uses the capital asset pricing model (CAPM). The CFO and the firms investment advisors believe that the appropriate risk-free rate is 4% and that the markets expected return equals 13%. Beta is 1.3.

Although Ecos current target capital structure includes 10% preferred stock, the company is considering using debt financing via a new bond issue to retire the outstanding preferred stock.

If Eco shifts its capital mix from preferred stock to debt, its financial advisors expect its beta to increase to 1.5. New debt would be in the form of bonds requiring an average discount of $30 per bond and flotation costs of $20 per bond from Par value and would be issued for 15 years at a 7.5% coupon rate.

e. IF they change their capital structure, what would be Ecos new cost of debt?

f. What would be the new cost of common equity?

g. What would be Ecos new weighted average cost of capital?

h. Which capital structurethe original one or this oneseems better? Why?