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 retained 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?

Question

Quizplus · Accepted Answer

The WACC is calculated as follows: WACC = (Wd * Rd * (1 - Tc)) + (Wp * Rp) + (We * Re), where Wd, Wp, and We are the weights of debt, preferred stock, and equity, respectively, and Rd, Rp, and Re are their respective costs. Substituting the given values: WACC = (0.35 * 6.50% * (1 - 0.40)) + (0.10 * 6.00%) + (0.55 * 11.25%) = 8.15%.

Avery Corporation's Target Capital Structure Is 35% Debt, 10% Preferred