The Pollos Chicken Company farms chickens for sale to grocery retailers.Pollos is all equity financed and its shareholders require a return of 7%.Gus Poultry Inc.farms chickens for sale to fast food restaurants.Gus Poultry has 20% debt in its capital structure (debt-to-equity is 0.25),and its cost of debt is 4%.What is Gus's WACC? Assume that the tax rate is 0%.

Question

Quizplus · Accepted Answer

Calculate the levered cost of equity from M&M Proposition II: k_E = k_U + (k_U - k_D) 11ea7fdb_fc63_41dd_a768_fb3930ee54ee_TB2902_11 k_E = 0.07 + (0.07 - 0.04) × 0.25 = 0.0775 Now calculate the WACC. k_w = w_Ek_E + w_Dk_D k_w = (0.80 × 0.0775) + (0.20 × 0.04) = 7%

The Pollos Chicken Company Farms Chickens for Sale to Grocery