Trexon Ltd. is a junior oil and gas exploration business that has most of its operations in Alberta. Recently, the business acquired rights to explore for oil and gas in the Gulf of Mexico. Trexon proposes to finance the new operations from the issue of common shares. At present, the business is financed by a combination of common share capital and debt. The common shares have a current market value of $2.60. The current level of dividend is $0.16 per share and this has been growing at a compound rate of 6% a year in recent years. The debt is perpetual and has a current market value of $94 per $100 nominal. Interest on the debt is at the rate of 12% and interest due at the year-end has recently been paid. At present, the business expects 60% of its financing to come from common shares and the rest from debt. In the future, however, the business will aim to finance 70% of its operations from common shares.
When the proposal to finance the new operations via a rights issue of shares was announced at the annual general meeting of the business, objections were raised by two shareholders present, as follows:
• Shareholder A argued: "I fail to understand why the business has decided to issue shares to finance the new operation. Surely it would be better to reinvest profit, as this is, in effect, a free source of financing?"
• Shareholder B argued: "I also fail to understand why the business has decided to issue shares to finance the new operation. However, I do not agree with the suggestion made by Shareholder A.

I do not believe that shareholder funds should be used at all to finance the new operation. Instead, the business should issue more debt, as it is inexpensive relative to common shares and would, therefore, reduce the overall cost of capital of the business."
The tax rate is 35%. Required:
(a) Calculate the weighted average cost of capital of Trexon that should be used in future investment decisions.
(b) Comment on the remarks made by:
(i) Shareholder A
(ii) Shareholder B.