Suppose that Tale Inc. has the following target capital structure: 50 percent stock, 40 percent debt, and 10 percent preferred stock. Its cost of equity is estimated at
10 percent, that of debt 6 percent, and that of preferred stock 4.5 percent. The tax rate is 35 percent.
a. What is Tale’s cost of capital?
b. Should Tale use more preferred stock financing than debt financing since it is cheaper?