Answer (C) is correct . Because Williams can sell unlimited amounts of all of its instruments, it can maintain its preferred capital structure. The cost of new debt is given as 4.8%. The cost of new preferred stock is 8.0% ($8 dividend ¡Â $100 net issue proceeds). No new common stock needs to be issued since sufficient retained earnings are ? available ($200,000 capital needed ¡Á 50% common stock = $100,000). Thus, the component cost of retained earnings can be used for the common stock component of the WACC calculation:Answer (A) is incorrect because This figure is the unweighted sum of each of the three elements of capital.
Answer (B) is incorrect because This figure is the cost of long-term debt alone. The firm wants to maintain a capital structure in which debt represents only 30% of the total capital.
Answer (D) is incorrect because This figure can only be obtained if new common stock is sold. New common stock will not be sold because the retained earnings can be used at a lower cost, and there is no need to sell stock when the total capital required is only $200,000.
|
If Williams, Inc., needs a total of $200,000, the firm’s weighted-average cost of capital would be
