Question

You were hired as a consultant to XYZ Company, whose target capital structure is 30% debt, 8% preferred, and 62% common equity. The interest rate on new debt is 6.30%, the yield on the preferred is 5.40%, the cost of common from retained earnings is 16.80%, and the tax rate is 40.00%. 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.

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.

A. 10.30%

B. 9.95%

C. 14.62%

D. 11.98%

E. 9.23%

Step 1

target capital structure:

Proportion of debt = Wd = 30%

Proportion of preferred capital = Ws = 8% and

Proportion of common equity = We = 62% common equity.

The interest rate on new debt = Kd = 6.30%,

the yield on the preferred = Ks = 5.40%,

the cost of common from retained earnings = Ke = 16.80%,

and the tax rate, T = 40.00%

Step 2

Hence, WACC = Wd x Kd x (1 - T) + Ws x Ks + We x Ke = 30% x 6...

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