Question 155: Please help me understand where the 8.5 comes from.

15S. The market value of Fords' equity, preferred stock and debt are $6 billion, $1 billion. and S1.5 billion, respectively. Ford has a beta of 1.5, the market risk premium is 89%, and the risk-free rate of interest is 4%. Ford's preferred stock pays a dividend of $3.50 each year and trades at a price of $30 per share. Ford's debt trades with a yield to maturity of 9.5%. What is Ford's WACC if its tax rate is 40%? A) 10.62% B) 9.65% C) 13.67% D) 14.34% Before-tax cost of debt Cost of preferred stock 9.5% 3.50/30 0.1167 4% + 1.518% 11.67% Cost of equity (common stock) WACC 16% (1.5/8.5) *9.5% *(1-0.40) + ( /8.5) * 11.67% + (6/8.5)" i 6%,-13.67%