The correct answer is B (10.9%).

Explanation:

The weighted average cost of capital (WACC) is calculated using the formula:

$WACC = W_d \times r_d \times (1 - t) + W_p \times r_p + W_e \times r_e$

Where:

• $W_d$ = Weight of debt = €60 million / (€60 + €20 + €120) million = 0.30
• $r_d$ = Before-tax cost of debt = 6%
• $t$ = Marginal tax rate = 40%
• $W_p$ = Weight of preferred stock = €20 million / (€60 + €20 + €120) million = 0.10
• $r_p$ = Cost of preferred stock = 8%
• $W_e$ = Weight of equity = €120 million / (€60 + €20 + €120) million = 0.60
• $r_e$ = Cost of equity = 15%

Substituting the values:

$WACC = (0.30 \times 6\% \times (1 - 0.40)) + (0.10 \times 8\%) + (0.60 \times 15\%)$

$WACC = (0.30 \times 6\% \times 0.60) + 0.8\% + 9\%$

$WACC = 1.08\% + 0.8\% + 9\% = 10.88\%$

This rounds to 10.9%, making B the correct choice.

Why not A or C?

• A (9.7%) is incorrect because it averages the costs without weighting them by market value.
• C (11.6%) is incorrect because it uses the before-tax cost of debt without adjusting for the tax shield.