**Answer:**

The cost of debt is 8%

The cost of preference shares is 9.6%

the Cost of equity is 11.4%

The WACC is approximately 9.2%

**Explanation:**

**The cost of debt is the interest rate on the debt which is 8%**

**The cost of preference shares is 9.6% calculated as pref share divided/market value of preference shares x 100% (1.25/13) x 100%**

The Cost of equity is 11.4% calculated as: dividend/market value + growth rate which is (4/54)+4%.

The WACC is a proportionate computation of the cost of capital using each component of the capital structure as a numerator of the total market value of the capital structure taking into account the floatation rate of of 2% in the debt, and the marginal tax rate of 21%.

Given the above, the component of capital and the associated costs are as follows:

Component Market Value Cost of capital

Debt 833,000.00* 8.0%

Preference shares 65,000.00 9.6%

Equity 1,080,000.00 11.4%

Total 1,978,000.00

* it is assumed that the debt holding has been reduced by 2% flotation costs.

The WACC is (debt/total)x kd x (1-21%) + (pref shares/total) x kpf + (equity/total) x ke

= (833,000/1,978,000) x 8% x (1-21%) + (65,000/1,978,000) x 9.6% + (1,080,000/1,978,000) x 11.4% = 9.2%.