Problem:
A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following sources and target market value proportions:
Source of Capital Target Market Proportions After-Tax Cost
Long-term debt 45% 5%
Preferred stock 10 14
Common stock equity 45 22
If the firm were to shift toward a more leveraged capital structure (i.e., a greater percentage of debt in the capital structure), the weighted average cost of capital would? Explain your answer.