Alfa Corporation (Alfa) has a target capital structure of 60% common stock, 5% preferred stock, and 35% debt. Its cost of equity is 11%, the cost of preferred stock is 5.5%, and the cost of debt is 7.2%. The relevant tax rate is 35%. i) What is Alfa’s weighted average cost of capital (WACC)? ii) The management has asked you about Alfa’s capital structure. They want to know why the company does not use more preferred stock financing, since it costs less than debt. What would you tell the management? Explain

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Alfa Corporation (Alfa) has a target capital structure of 60% common stock, 5% preferred stock, and 35% debt. Its cost of equity is 11%, the cost of preferred stock is 5.5%, and the cost of debt is 7.2%. The relevant tax rate is 35%.
i) What is Alfa’s weighted average cost of capital (WACC)?
ii) The management has asked you about Alfa’s capital structure. They want to know why the company does not use more preferred stock financing, since it costs less than debt. What would you tell the management? Explain.

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