1. Given the following information, calculate the firm's weighted average cost of capital (WACC). Market value of common stock=$60 million; market value of preferred stock=$10 million, market value of debt=$30 million; cost of common stock=15%; cost of debt=10%; tax rate=40%. The preferred stock pays a constant $4 dividend and is now selling for $50 a share.
A) 10.60%
B) 11.60%
C) 12.60%
D) 13.60%
2. Which of the following statements regarding the M&M Propositions is true?
A) Without taxes, the firm's capital structure is relevant.
B) Without taxes, the optimal amount of leverage for a firm is zero debt.
C) With taxes, a firm can increase its value by reducing debt.
D) Once the tax effect is considered, there is a strictly increasing linear relationship between the amount of debt and the firm value.