You were hired as a consultant to Fenerbahce SK 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 14.75%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC?

Question

Talan Reed

Business

30 June, 08:39

You were hired as a consultant to Fenerbahce SK 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 14.75%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC?

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Rafael Simon · Answer 1

10.0775%

Explanation:

The formula to compute WACC is shown below:

= Weightage of debt * cost of debt * (1 - tax rate) + (Weightage of preferred stock) * (cost of preferred stock) + (Weightage of common stock) * (cost of retained earning)

= 0.35 * 6.50% * (1 - 0.40) + (0.10 * 6%) + (0.55 * 14.75%)

= 1.365% + 0.6% + 8.1125%

= 10.0775%

Simply we multiply the weighatge with the capital structure cost