$17$ EXAMPLES

A firm's target capital structure consists of $33\%$ debt, $2\%$ preferred stock, and $65\%$ common

equity. Using the relevant costs calculated previously, and assuming that all equity will

come from retained earnings, what is the firm's WACC? $($For the cost of equity, use the

midpoint of the range chosen by Allied.$)$

WACC $=$

The WACC will increase if the firm expands so rapidly that it exhausts all of its retained

earnings for the year and must issue new common stock. Here is the WACC in this case:

WACC $=$