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

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
Before Tax Cost of Debt (k d ) = 6.50% Tax rate(T) = 40% Preferred Stock yield(k p ) = 6.00% Cost of retained earnings(k s ) = 12.25% Target Capital Structure: Common stock 50%(0.50) Debt 40% (0.40) Preferredstock 10% (0.10) ——— 100 —— Component Cost of debt (k d ) = k d (1-T) k d = 6.50%(1-0.4) = 0.065 * 0.6 = 0.039 (or) 3.9% Component Cost of

debt (k d ) =3.9% Calculating Weighted Average Cost of Capital(WACC): WACC= w d k d (1-T) w p k p w c k s 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%

ANSWER:

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