The senior management of Folds Ltd. (Folds) is anticipating a change to its capital structure. The interest cost of new debt and preferred equity has increased in the past few months, and senior management wants to determine what the new cost of capital would be if Folds issued new debt and preferred shares.

Prior to the increase in the before-tax cost of debt from 4.75% to 7.50%, the weighted average cost of capital (WACC) was 7.44%. Folds financing was 45% debt and 55% common equity. Folds is subject to tax at a rate of 35%. Folds can issue a new series of preferred shares priced at $23.50 per share, which pay an annual dividend of $1.45. Issuance costs for new debt and preferred equity are 5% before tax. The cost of common equity stays the same after the new issues of debt and preferred shares.

Required:

Calculate the new WACC of Folds using the cost of new debt and preferred equity. The capital structure for Folds will be 40% debt, 10% preferred equity, and 50% common equity following the new issues. (9 marks)