Question: Calculating WACC. Bargeron Corporation has a target capital structure of 75 percent common stock, 5 percent preferred stock, and 20 percent debt. Its cost of equity is 10.9 percent, the cost of preferred stock is 5.1 percent, and the pretax cost of debt is 5.8 percent. The relevant tax rate is 35 percent.
a. What is the company's WACC?
b. The company president has approached you about the company's capital structure. He wants to know why the company doesn't use more preferred stock financing, since it costs less than debt. What would you tell the president?