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 11.25%,and the tax rate is 40%.The firm will not be issuing any new stock.What is Quigley's WACC?
A)8.15%
B)8.48%
C)8.82%
D)9.17%
E)9.54%

Question

Quizplus · Accepted Answer

The WACC is calculated as follows: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)) + (P/V * Rp), where E, D, and P are the market values of equity, debt, and preferred stock, respectively, and V is the total value (E + D + P). Re, Rd, and Rp are the costs of equity, debt, and preferred stock, and Tc is the tax rate. Substituting the given values: WACC = (0.55 * 11.25%) + (0.35 * 6.50% * (1-0.40)) + (0.10 * 6.00%) = 8.15%.

You Were Hired as a Consultant to Quigley Company,whose Target