Answer:
WACC = 11.02%
Explanation:
Since it is going to use "retained earnings" to source common equity, we take cost of equity to be 13.3% NOT 13.9% for new equity, because they are going to use retained earnings.
The Weighted Average Cost of Capital (WACC) formula is:
[tex]WACC=W_eKe+WpKp+WdKd(1-T)[/tex]
The W's are the respective weights of equity, preferred stock, and debt in the portfolio
The K's are the cost of each respectively
T is the tax rate
We are given the information, we simply plug them into the formula and find the WACC. Shown below:
[tex]WACC=W_eKe+WpKp+WdKd(1-T)\\WACC=(0.55)(0.133)+(0.05)(0.099)+(0.4)(0.107)(1-0.25)\\WACC=0.1102[/tex]
Converting to percentage,
WACC = 0.1102 * 100 = 11.02%