A firm has a capital structure containing 40 percent debt, 20 percent preferred stock, and 40 percent common stock equity. The firm's debt has a yield-to-maturity of 8.1 percent, its annual preferred stock dividend is $3.10, and the preferred stock's current market price is $50.00 per share.
The firm's common stock has a beta of 0.90, and the risk-free rate and the market return are currently 4.0 percent and 13.5 percent, respectively. The firm is subject to a 40 percent marginal tax rate.
a. What is the firm's cost of preferred stock?
b. What is the firm's cost of common stock?
c. Calculate the firm's after-tax WACC .
d. Recalculate the firm's WACC, assuming that its capital structure is deleveraged to contain 20 percent debt, 20 percent preferred stock, and 60 percent common stock.
e. Compare, contrast, and discuss your findings from parts (c) and (d).