Final answer:
To answer the WACC question, the cost of equity, preferred stock, and debt are calculated using different formulas, adjusting for taxes where applicable. Without the capital structure weightings for Blue Thumb, it's impossible to determine the accurate WACC; thus none of the provided answer options can be definitively chosen.
Step-by-step explanation:
To calculate the company's WACC (Weighted Average Cost of Capital), we need to consider the cost of equity, preferred stock, and debt, while taking into account the corporate tax rate. The cost of equity can be calculated using the Capital Asset Pricing Model (CAPM), which is:
Cost of Equity = Rf + β(Rm - Rf) = 5.5% + 1.2(11.5% - 5.5%) = 5.5% + 1.2(6%) = 5.5% + 7.2% = 12.7%
The cost of preferred stock is the dividend divided by the price of the preferred stock, so:
Cost of Preferred Stock = Dividend / Price = $8.50 / $88 = 9.66%
The cost of debt is the yield to maturity on the company's bonds, which is given as 9.7%. However, because interest expense is tax-deductible, we must adjust this for taxes:
After-Tax Cost of Debt = Yield to Maturity × (1 - Tax Rate) = 9.7% × (1 - 0.30) = 9.7% × 0.70 = 6.79%
To find the WACC, we would typically weight these costs by the proportion of equity, preferred stock, and debt in the company's capital structure. However, the proportions are not provided in the question. In reality, WACC calculation requires these weights. With the information given, we cannot accurately compute WACC, because WACC is the weighted sum of the costs of equity, preferred equity, and after-tax debt. Therefore, none of the answer options (A, B, C, D) can be confirmed as correct without additional information on the company's capital structure weightings.