**Answer:**

a. With New Stock = 8.307%

b. With Old stock = 7.971%

**Explanation:**

The weighted average cost of capital (WACC) defines the cost rate that blends the capital structure cost including equity, debt, and preferred stock.

**Requirement A**

If it uses retained earnings as its source of common equity,

Given,

The weight of the combination of the capital structure is -

= 40% = 0.40; = 5% = 0.05; = 55% = 0.55

For cost of debt, we have to find cost of debt after tax, =

6.9% x (1 - 0.40) = 4.14%

Cost of preferred stock, = 6.4%

Cost of new Equity, = 11.51%

We know, the weighted average cost of capital (WACC) =

x + x + x

= (0.40 x 4.14%) + (0.05 x 6.4%) + (0.55 x 11.51%)

= 1.656% + 0.32% + 6.3305%

= 8.307%

**Requirement B**

If it has to issue new common stock, the weighted average cost of capital (WACC) = x + x + x

Given,

The weight of the combination of the capital structure is -

= 40% = 0.40; = 5% = 0.05; = 55% = 0.55

For cost of debt, we have to find cost of debt after tax, =

6.9% x (1 - 0.40) = 4.14%

Cost of preferred stock, = 6.4%

Cost of new Equity, = 10.9%

Therefore, putting the value in the equation,

WACC = (0.40 x 4.14%) + (0.05 x 6.4%) + (0.55 x 10.9%)

WACC = 1.656% + 0.32% + 5.995%

WACC = 7.971%