The firms targeted capital structure is: 40% debt, 30% preferred shares and 30% common equity.

The cost of debt is 4.35%

The cost of preferred shares is 6.10%

The cost of common shares is 6.90%

The weighted average cost of capital formula is:

k_a = w_d x k_d + w_p x k_p + w_e x k_e

1. Compute the weighted average cost of capital. (2)
2. Explain how this cost of debt relates to the potential new investments. (50 word maximum) (4)

3. How does your answer in part c change, if the new investment is funded by debt alone, and no shares will be issued to fund the new project? (50 word maximum) (2)