The return of an all equity firm is 12%. If the firm changes its capital structure to 50% debt and 50% equity using 8% debt financing. Required:

a) What is the equity cost of capital of the levered firm? What is the weighted average cost of capital of the levered firm? (Assume a perfect market without tax.)

b) Assume the tax rate is 20%. What is the weighted average cost of capital of the levered firm? Do the MM propositions hold in this case?