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 10.50%,and the tax rate is 25%.The firm will not be issuing any new stock.What is Quigley's WACC? Round final answer to two decimal places.Do not round your intermediate calculations.

Question

Quizplus · Accepted Answer

Step-by-step calculation of Quigley's WACC:

1. Calculate the cost of debt:

Cost of debt = interest rate*(1 - tax rate) = 6.50%*(1-0.25) = 4.88%

2. Calculate the cost of preferred stock:

Cost of preferred stock = yield on preferred stock = 6.00%

3. Calculate the cost of common equity:

Cost of common equity = cost of retained earnings*(1 - flotation cost) = 10.50%*(1-0) = 10.50%

4. Calculate the weights of each component:

Weight of debt = 35%
Weight of preferred stock = 10%
Weight of common equity = 55%

5. Calculate the WACC:

WACC = (Weight of debt * Cost of debt) + (Weight of preferred stock * Cost of preferred stock) + (Weight of common equity * Cost of common equity)

WACC = (0.35 * 4.88%) + (0.10 * 6.00%) + (0.55 * 10.50%) = 8.08%

Therefore, Quigley's WACC is 8.08%. Option D is the correct answer.

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