The costs of common stock, preferred stock and debt of UWRL Inc. are 18%, 6.5% and 8% respectively. Assume that the firm's (targeted/optimal) capital structure is 50% common stock, 5% preferred stock and 45% debt. The relevant corporate income tax rate is 35%. (i) Compute UWRL's WACC. (ii) In terms of the risks faced by investors, debt should carry a lower risk than that of preferred shares. Provide a possible explanation for the difference between the two costs stated above. Support your answer with calculation.
