Question

Avery Corporation's 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 reinvested earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Avery's WACC? Select one: a. 8.15% b. 8.48% c. 8.82% d. 9.17% e. 9.54%

Answer 1

Answer:

a. 8.15%

Explanation:

In order to find the WACC we will multiply the cost of each type of capital source and multiply it by it's weight

Common Equity = Weight of equity * Cost of equity

=0.55*0.1125=0.061875=6.1875%

Preferred stock= Weight of preferred stock*yield of preferred stock

0.10*0.06=0.006= 0.6%

Debt= Weight of debt*interest rate*(1-tax rate)

=0.35*0.065*(1-0.4)

=0.01365=1.365%

Add all of these to find WACC

6.1875+1.365+0.6= 8.15%