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 40%.The firm will not be issuing any new common stock.What is Avery's WACC?
A) 8.15%
B) 8.48%
C) 8.82%
D) 9.17%
E) 9.54%

Question

Quizplus · Accepted Answer

The correct answer is A.The WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc) + (P/V) * Rpwhere:E = market value of equityV = total market value of the firmRe = cost of equityD = market value of debtRd = cost of debtTc = corporate tax rateP = market value of preferred stockRp = cost of preferred stockIn this case, we have:E/V = 55%D/V = 35%P/V = 10%Re = 11.25%Rd = 6.50%Tc = 40%Rp = 6.00%Plugging these values into the formula, we get:WACC = (0.55) * 0.1125 + (0.35) * 0.0650 * (1 - 0.40) + (0.10) * 0.0600= 0.0619 + 0.0228 + 0.0060= 0.0815 or 8.15%

Avery Corporation's Target Capital Structure Is 35% Debt,10% Preferred,and 55