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. 9.17% c. 8.48% d. 9.54% e. 8.82%

WACC is the firm's weighted average cost for the capital that is employed from different sources which includes common equity, preferred equity and debt.

In order to calculate WACC, the weighted average cost of each capital is added, so the formula becomes:

WACC = (E x %E) + (D x (1 - Tax) x %D) + (PE x %PE)

E = Common equity

D = Debt

PE = Preferred equity

%E = Common equity / total capital

%D = Debt / total capital

%PE = Preferred equity / total capital

Tax = Tax rate

Interest on debt is a tax deductible expense therefore the interest rate is taken after accounting for tax in order to calculate WACC.

Calculation:

Using the above formula we can calculate WACC

WACC = (11.25% x 55%) + (6.5% x (1-40%) x 35%) + (6% x 10%)

WACC = 0.0815 or 8.15%

jayilych4real jayilych4real · Answer 2 · 2022-04-19T13:24:23+02:00

Quigley's WACC is A. 8.15

Calculations and Parameters:

Noting that WACC means weighted average cost, there would be the formula of

WACC = (E x %E) + (D x (1 - Tax) x %D) + (PE x %PE)

Where

E = Common equity
D = Debt
PE = Preferred equity
%E = Common equity / total capital
%D = Debt / total capital
%PE = Preferred equity / total capital
Tax = Tax rate

Because interest on debt is a tax-deductible expense, it would be taken after accounting for tax.

WACC = (11.25% x 55%) + (6.5% x (1-40%) x 35%) + (6% x 10%)

WACC = 0.0815 or 8.15%