Question

You 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. Quigley's WACC is closest to: 8.15% 8.48% 8.82% 9.17% 9.54%

Answer 1

Answer:

8.15 %

Explanation:

Weighted Average Cost of Capital (WACC) is the business Cost of permanent sources of finance pooled together. It shows the risk of the business and is used to evaluate projects.

WACC = Cost of Equity x Weight of Equity + Cost of Preferred Stock x Weight of Preferred Stock + Cost of Debt x Weight of Debt

Remember to use the After tax cost of debt :

After tax cost of debt = Interest x ( 1 - tax rate)

                                    = 6.50% x (1 - 0.40)

                                    = 3.90 %

therefore,

WACC = 11.25% x 55% + 6.00% x 10% +  3.90 % x 35%

            = 8.15 %

Thus,

Quigley's WACC is closest to 8.15 %.