Question: A company's target capital structure calls for 50% debt, 5% preferred stock and 45% common stock. The before tax cost of debt is 8%, the cost of preferred stock is 10% and the cost of common stock is 20%.
Calculate the firms weighted average cost of capital (WACC) if its marginal tax rate (MTR) is 35%.
What will happen to the weighted average cost of capital is the cost of equity decreases from 20% to 15%?