Problem:
Capital Co. has a capital structure, based on current market values, that consists of 38 percent debt, 4 percent preferred stock, and 58 percent common stock.
Requirement:
Question: If the returns required by investors are 10 percent, 10 percent, and 16 percent for the debt, preferred stock, and common stock, respectively, what is Capital's after-tax WACC? Assume that the firm's marginal tax rate is 40 percent.
Note: Provide support for your underlying principle.