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You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt,...

You were hired as a consultant to Quigley 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 10.50%, and the tax rate is 25%. The firm will not be issuing any new stock. What is Quigley's WACC? Round final answer to two decimal places. Do not round your intermediate calculations.

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Answer #1
Given
Interest Rate of Debt = 6.5%
Yield on Preferred Stock = Kp = 6%
Cost of Retained Earnings = Ke = 10.50%
Tax Rate = 25% = 0.25
Calculation -
1 Cost of Debt = Kd = Interest Rate of Debt After Tax
= 'Interest Rate of Debt (1-Tax Rate)
= 6.5% (1-0.25)
= 4.875%
2 WACC
Particulars Weights (Wt) Cost Wt x Cost
Debt 35 4.875% 1.71
Preferred Stock 10 6% 0.60
Retained Earnings 55 10.50% 5.78
WACC 8.09
WACC = 8.09%
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