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WACC

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1. You were hired as a consultant to Locke Company, and you were provided with the following data: Target capital structure: 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 7.5%, the yield on the preferred is 7.0%, the cost of retained earnings is 11.50%, and the tax rate is 40%. The firm will not be issuing any new stock.

What is the firm's WACC?

8.25%
8.38%
8.49%
8.61%
8.76%

2. Johnson Industries finances its projects with 40% debt, 10% preferred stock, and 50% common stock.

The company can issue bonds at a YTM of 8.4%.
The cost of preferred stock is 9%.
The risk-free rate is 6.57%.
The market risk premium is 5%.
Johnson Industries' beta is equal to 1.3.
Assume that the firm will be able to use retained earnings to fund the equity portion of its capital budget.
The company's tax rate is 30%.

What is the company's WACC?

8.33%
8.95%
9.79%
10.92%
13.15%

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Solution Summary

The solution explains how to calculate the WACC

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1. WACC = Proportion of debt X after tax cost of debt + Proportion of preferred stock X cost of preferred stock + Proportion on common stock X cost of common ...

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