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 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:

Quigley's WACC is 10.08%

Explanation:

To calculate the WACC we have to use the following formula:

WACC = Cost of Debt*(1-Tax Rate)*Weight of Debt + Cost of Preferred Stock*Weight of Preferred Stock + Cost of Retained Earnings*Weight of Equity

= 6.50*(1-.40)*.35 + 6*.10 + 14.75*.55 = 10.0775% which is= 10.08%

Quigley's WACC is 10.08%

Please take into account that the Cost of Preferred Stock and the retained earnings are not subject to tax.