Question

were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Quigley's WA

Answer 1

Answer:

8.15%

Explanation:

The computation of the WACC is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of preferred stock) × (cost of preferred stock) + (Weightage of  common stock) × (cost of common stock)

= (0.35 × 6.50%) × ( 1 - 40%) +  (0.10 × 6%) +  (0.55 × 11.25%)

= 1.365% + 0.6% + 6.1875%

= 8.15%

We simply multiplied the weighted of each capital structure with its cost so that the weighted cost of capital could come