Answer:
WACC = 8.56%
Explanation:
First, we need to find out what is the equivalent percentage of every source of cash, I mean, if the sum of all sources is 1,040,000 (275,000+650,000+115,000) each source participation will be as follows.
Debt = 275000/1040000=26.44%
Common Stocks= 650000/1040000=62.50%
Preferred Stocks= 115000/1040000= 11.06%
Now, let's remember that common stocks and preferred stocks are not tax-deductible, on the other hand, the debt it is, so, the afer-tax cost of each source is:
Debt = 5.75% x (1-0.25) = 4.31%
Common Stocks = 9.75%
Preferred Stocks = 12%
Finally, our weighted average cost of capital is:
WACC = 4.31% x (26.44%) + 9.75% x (62.50%) + 12% x (11.06%) = 8.56%
Best of luck
