A firm has determined its cost of each source of capital and its optimal capital structure which is comprised of the following sources;

Long-term debt = 45%, after-tax cost = 7%

Preferred stock = 15%, after-tax cost = 10%

Common stock equity = 40%, after-tax cost = 14%

The weighted average cost of capital for this firm is;

10.25%

Explanation:

Data provided in the question:

Long-term debt = 45%, after-tax cost = 7%

Preferred stock = 15%, after-tax cost = 10%

Common stock equity = 40%, after-tax cost = 14%

Now,

The weighted average cost of capital for this firm will be calculated as:

= Long term debt * after-tax cost + Preferred stock * after-tax cost + Common stock equity * after-tax cost

or

= 0.45 * 0.07 + 0.15 * 0.10 + 0.40 * 0.14

or

= 0.0315 + 0.015 + 0.056

= 0.1025

or

= 0.1025 * 100%

= 10.25%