Question

You were hired as a consultant to Fenerbahce SK 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 retained earnings is 14.75%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC?

Answer 1

Answer:

10.0775%

Explanation:

The formula to compute 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 retained earning)

= 0.35 × 6.50% × (1 - 0.40) + (0.10 ×6%) + (0.55 × 14.75%)

= 1.365% + 0.6% + 8.1125%

= 10.0775%

Simply we multiply the weighatge with the capital structure cost