Detailed Answer
Answer (C) is correct. Because Williams can sell unlimited amounts of all of its instruments, it can maintain its preferred capital structure. The cost of new debt is given as 4.8%. The cost of new preferred stock is 8.0% ($8 dividend ÷ $100 net issue proceeds). No new common stock needs to be issued since sufficient retained earnings are available ($200,000 capital needed × 50% common stock = $100,000). Thus, the component cost of retained earnings can be used for the common stock component of the WACC calculation: Cost of Weighted Component Weight Capital Cost
New long-term debt 30% × 4.8% = 1.44% New preferred stock 20% × 8.0% = 1.60% Retained earnings 50% × 7.0% = 3.50%
Total 6.54%