VV plans to issue new 10-year bonds. Management at Brown wants to estimate the effect of this bond issue on its weighted average cost of capital (WACC) for future capital expenditure analysis. Brown has collected the following information

• VVs post-bond-issue capital structure will consist of 50% debt, 20% preferred shares and 30% common equity.
• The new 10-year bonds will have a 6% annual coupon and will be issued at par. They will incur an after-tax flotation cost of 2%.
• Outstanding preferred shares have a dividend of $4 per share and currently trade at a price of $80.
• VVs effective income tax rate is 30%.
• VVs common stock trades at a price of $30 and pays NO dividends. Browns market beta is 1.2. Management believes that new stock could be issued at the current price.
• The current market risk-free rate is 3%, while the market index return is 9%.

Required

(a)Calculate VVs WACC after the bond issue.

(b) Explain how WACC should be used.