Question

You were hired as a consultant to Kingsley Company, whose target capital structure is 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 7.00%, the yield on the preferred is 6.00%, the cost of retained earnings is 10.50%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC

Answer 1

Quigley's WACC = 7.53%

Step-by-step explanation:

The after-tax cost of debt = 0.07 * (1-tax rate)

The after-tax cost of debt = 0.07 * (1 -0.4)

The after-tax cost of debt = 0.07 * 0.6

The after-tax cost of debt = 0.042

The after-tax cost of debt = 4.2%

WACC = Respective costs*Respective weight

40% debt, 10% preferred, and 50% common equity

WACC = (4.2*0.4) + (0.1*6) + (0.5*10.5)

WACC = 1.68 + 0.6 + 5.25

WACC = 7.53%