You have estimated the after-tax cost of debt to be 5.5%, the cost of preferred to be

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Question:

You have estimated the after-tax cost of debt to be 5.5%, the cost of preferred to be 6.5% and the cost of common to be 8.6%. Your firm obtains 40% of its financing from long-term debt, 20% of its financing from preferred stock and 40% of its financing from common stock. Calculate the firm’s cost of capital.

List two reasons why the cost of common stock financing is higher than the effective cost of debt financing for firms.