Assuming that ABC Firm has an optimal capital structure; comprised of debt, preferred stock and common equity. In this scenario, Firm currently has 45 percent debt, 2 percent preferred stock and 53 percent common equity in its capital structure. Firm's before-tax cost of debt is 10 percent and corporate tax rate is 40 percent; beta for common stock is 0.85 with market return 14% and T-bills return 10%; whereas cost of preferred stock is 10.3 percent.