Question: A firm has the following balance-sheet figures:

Debt                                                      $64,000,000

Equity:

    7,500,000 shares at $6 each                  $45,000,000

    Retained earnings                                 $81,000,000

Given the substantial fall in interest rates in recent years, the firm's debt currently has a market price of $75,000,000. The common shares are trading at $38 each. New debt can currently be issued at an after-tax cost of kb = 6%, and the cost of new equity is estimated at ke = 1 4%. Issuing and underwriting expenses can be ignored.

(a) Compute the firm's weighted average cost of capital using both book- and market-value proportions.

(b) Assume that the firm raised an additional $90,000,000 using market-value proportions. What would its book-value proportions be after such new financing?

(c) Assume that the firm raised the additional $90,000,000 using book-value proportions. What would its market-value proportions be after the new financing?

(d) Briefly explain your findings.