Question $2$

Multimedia Corporation has a target capital structure of $75$ percent common stock, $5$ percent preferred stock and $20$ percent debt. Its cost of equity is $11\mathrm{.}25$ percent, the cost of preferred stock is $5\mathrm{.}5$ percent, and the cost of debt is $6\mathrm{.}1$ percent. The relevant tax rate is $35$ percent.

a$.$ What is Multimedia$$s WACC?

b$.$ The company president has approached you about Multimedia$$s capital structure. He wants to know why the company doesn$$t use more preferred stock financing, since it costs less than debt. What would you advise your president.