Wellington Gas has a target capital structure of 50% common equity, 40% debt, and 10% preferred stock. The cost of retained earnings is 16%, and the cost of new equity (external) is 16.7%. Wellington can sell debentures that will have an after-tax cost of 8.3% and the after-tax cost of preferred stock will be 11.9%. What is the marginal cost of capital before and after the break point?

Question 3Answer

a.
12.51% and 12.86%


b.
14.23% and 14.68%


c.
11.18% and 11.53%


d.
12.51% and 11.53%