WACC | Question

Hi All,

Question : ABC Ltd. is a conglomerate that is into high frequency trading based on algorithm analysis. To finance its activities, it has issued equity, debt and preferred capital, which has market values in equal proportions. The historical cost of equity has been 10%, but due to increases in regulatory risks associated with high frequency the marginal cost of equity is estimated to be 11.5%.

ABC Ltd. has issued debt with yield of 8.7% after tax in the market. ABC has also issued preferred capital with an annual yield of 7% of face value. Current market value of preferred capital is 1.1 times the face value. The WACC in % is closest to:
A) 8.35 %B) 8.85 % C) 9.07%
Correct Ans is 8.85 %

My doubt for deriving the cost of equity we divided 7%/1.1… why we need to do that

Since the preferred is trading at a premium to its market value, the yield needs to be reduced just like you would do for a bond. Dividing the yield by the premium of 1.1 does just that.