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Answer (A) 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). The common equity component will amount to $500,000 ($1,000,000 capital needed ¡Á ? 50% common stock). Retained earnings are available to cover $100,000 (10% of the total), so new common stock will have to be issued to cover the other 40%. The cost of new common stock is 7.6% ($7?dividend ¡Â $92 net issue proceeds).<
Answer (B) is incorrect because This percentage is the cost of the long-term debt alone.
Answer (C) is incorrect because This percentage would be correct only if the equity capital were obtained totally from retained earnings. Because only $100,000 of retained earnings is available, the remainder of equity capital must come from sales of new common stock.
Answer (D) is incorrect because This percentage is the unweighted total of each of the four elements of capital.