Question

ou 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 retained earnings is 10.50%, and the tax rate is 25%. The firm will not be issuing any new stock. What is Quigley's WACC

Answer 1

Answer:

8.08%

Explanation:

WACC = (E/V)*Re + (D/V)*Rd*(1-Tc)

Re = cost of equity, Rd = cost of debt, E = market value of the firm's equity, D = market value of the firm's debt, V = E + D, E/V = % of equity financing, D/V = % of debt financing, Tc = corporate tax rate

WACC = (10%*6%) + (55%*10.50%) + (35%*6.50%)*(1-25%)

WACC = (0.1*0.06) + (0.55*0.105) + (0.35*0.065*0.75)

WACC = 0.006 + 0.05775 + 0.0170625

WACC = 0.0808125

WACC = 8.08%

So therefore, Quigley's WACC is 8.08%.