MULTIPLE CHOICE A company has outstanding debt with a market value of $250M and common stock...
MULTIPLE CHOICE
A company has outstanding debt with a market value of $250M and common stock with a market value of $550M. If its debt has a before-tax cost of 7%, a before-tax cost of equity of 10% and a corporate tax rate of 40%, what is its WACC?
A.7.86%
B.5.44%
C.6.55%
D.8.19%
Homework Answers
After-tax cost of debt=7*(1-tax rate)
=7*(1-0.4)=4.2%
Total value=(250+550)=$800 M
WACC=Respective costs*Respective weight
=(250/800*4.2)+(550/800*10)
which is equal to
=8.19%(Approx).
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