XYZ Corporation has a target capital structure of 50% common stock, 5% preferred stock, and 45% debt. Its cost of equity is 18%, the cost of preferred stock is 6.5% and the cost of debt is 8%. The relevant tax rate is 35%.

(a) What is XYZs weighted average cost of capital (WACC)? (4 marks)

(b) Why did the firm not use more preferred stock financing since it costs less than debt? (3 marks)