The firm's target capital structure is the mix of debt,preferred stock, and common equity the firm plans to raise fundsfor its future projects. The target proportions of debt, preferredstock, and common equity, along with the cost of these components,are used to calculate the firm's weighted average cost of capital(WACC). If the firm will not have to issue new common stock, thenthe cost of retained earnings is used in the firm's WACCcalculation. However, if the firm will have to issue new commonstock, the cost of new common stock should be used in the firm'sWACC calculation.

Quantitative Problem: Barton Industries expectsthat its target capital structure for raising funds in the futurefor its capital budget will consist of 40% debt, 5% preferredstock, and 55% common equity. Note that the firm's marginal taxrate is 25%. Assume that the firm's cost of debt, r_d, is9.7%, the firm's cost of preferred stock, r_p, is 8.9%and the firm's cost of equity is 12.3% for old equity,r_s, and 12.7% for new equity, r_e.

What is the firm's weighted average cost of capital(WACC₁) if it uses retained earnings as its source ofcommon equity? Do not round intermediate calculations. Round youranswer to two decimal places.

  

What is the firm’s weighted average cost of capital(WACC₂) if it has to issue new common stock? Do notround intermediate calculations. Round your answer to two decimalplaces.