A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions:

Source of Capital Target Marke Proportions Long-term debt 20%. Preferred stock 10 Common stock equity 70

Debt: The before-tax cost of debt for the firm is 7.7% Prefered Stock The firm has determined it can issue preferred stock at $75 per share par value, The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate of 3%. Additionally, the firm's marginal tax rate is 40 percent.

a) Calculate the firm's lowest Welghted Average Cost of Capital (WACC).

b) Why is the cost of capital reflerred to as the required rate of return?