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2 November, 13:51

Avery Corporation's 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 common from reinvested earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Avery's WACC? Select one: a. 8.15% b. 8.48% c. 8.82% d. 9.17% e. 9.54%

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  1. 2 November, 15:37
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    a. 8.15%

    Explanation:

    In order to find the WACC we will multiply the cost of each type of capital source and multiply it by it's weight

    Common Equity = Weight of equity * Cost of equity

    =0.55*0.1125=0.061875=6.1875%

    Preferred stock = Weight of preferred stock*yield of preferred stock

    0.10*0.06=0.006 = 0.6%

    Debt = Weight of debt*interest rate * (1-tax rate)

    =0.35*0.065 * (1-0.4)

    =0.01365=1.365%

    Add all of these to find WACC

    6.1875+1.365+0.6 = 8.15%
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