You were hired as a consultant to XYZ Company, whose target capital structure is

Question

You were hired as a consultant to XYZ Company, whose target capital structure is 32% debt, 10% preferred, and 58% common equity. The interest rate on new debt is 8.30%, the yield on the preferred is 5.60%, the cost of common from retained earnings is 15.95%, and the tax rate is 25.00%. The firm will not be issuing any new common stock. What is XYZ's WACC? Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.

Available answers: 12.63%, 9.91%, 11.80%, 14.75%, 11.45%

Explanation / Answer

Solution.

Weights Costs
Debt. 32% 8.30%
Preferred 10% 5.60%
Common 58% 15.95%
WACC = wd ×rd(1- T) + wp ×rp + wc ×rs

=.32×.0830(1-.25)+.10×.0560+.58×.1595

=.01992+.0056+.09251

=.11803
. Or 11.80%

Option b is correct

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