You were hired as aconsultant to Quigley Company, whose target capital structure

ID: 2770586 • Letter: Y

Question

You were hired as aconsultant to Quigley Company, whose target capital structure is40% debt, 10% preferred, and 50% common equity. The interest rateon new debt is 6.50%, the yield on the preferred is 6.00%, the costof retained earnings is 12.25%, and the tax rate is 40%. The firmwill not be issuing any new stock. What is Quigley'sWACC? You were hired as aconsultant to Quigley Company, whose target capital structure is40% debt, 10% preferred, and 50% common equity. The interest rateon new debt is 6.50%, the yield on the preferred is 6.00%, the costof retained earnings is 12.25%, and the tax rate is 40%. The firmwill not be issuing any new stock. What is Quigley'sWACC? 8.29% 8.62% 8.96% 9.32% 9.69%

Explanation / Answer

Before Tax Cost of Debt (kd) = 6.50%

Tax rate(T) = 40%

Preferred Stock yield(kp) = 6.00%

Target Capital Structure:

Common stock - 50%(0.50)

Debt - 40% (0.40)

Preferredstock - 10% (0.10)

-----------

100

--------

Component Cost of debt (kd) = kd(1-T)

kd = 6.50%(1-0.4)

= 0.065 * 0.6

= 0.039 (or) 3.9%

Calculating Weighted Average Cost of Capital(WACC):

WACC= wd kd (1-T) + wpkp + wc ks

WACC = (0.40*0.039) + (0.10 * 0.06) + (0.50 *0.1225)

= 0.0156 + 0.006 + 0.06125

= 0.08285(or) 8.285%

Weighted Average Cost of Capital(WACC) = 8.29%

Navigate

You were hired as a practice manager four months back by a specialty group pract

You were hired as an analyst to develop a new information system to automate the

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.

You were hired as aconsultant to Quigley Company, whose target capital structure

Question

Explanation / Answer

Related Questions

Navigate