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 reinvested earnings is 11.25%, and the tax rate is 25%.The firm will not be issuing any new common stock.What is Avery's WACC?

Question

Quizplus · Accepted Answer

The Weighted Average Cost of Capital (WACC) is calculated as follows: WACC = (E/V * Re) + ((D/V * Rd) * (1-T)) + (P/V * Rp) where E = market value of the firm's equity, D = market value of the firm's debt, P = market value of the firm's preferred stock, V = E + D + P (total market value of the firm), Re = cost of equity, Rd = cost of debt, Rp = cost of preferred stock, and T = tax rate. Given: E/V = 55%, D/V = 35%, P/V = 10%, Re = 11.25%, Rd = 6.50%, Rp = 6.00%, T = 25%. Plugging in the values: WACC = (0.55 * 11.25%) + (0.35 * 6.50% * (1-0.25)) + (0.10 * 6.00%) = 6.1875% + 1.70625% + 0.6% = 8.49375%, which rounds to 8.49%.

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