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Wentworth's Five and Dime Store has a cost of equity of 11.2 percent. The company has an aftertax cost of debt of 4.8 pe...

Wentworth's Five and Dime Store has a cost of equity of 11.2 percent. The company has an aftertax cost of debt of 4.8 percent, and the tax rate is 39 percent. If the company's debt–equity ratio is .72, what is the weighted average cost of capital?

  • 6.39%

  • 7.30%

  • 8.52%

  • 6.69%

  • 7.74%

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Answer #1

Debt-equity ratio=debt/equity

Hence debt=0.72*equity

Let equity be $x

Debt=$0.72x

Total=$1.72x

WACC=Respective costs*Respective weight

=(x/1.72x*11.2)+(0.72x/1.72x*4.8)

=8.52%(Approx).

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