Use the information for the question(s)below.
KT Enterprises is considering undertaking a new project.Based upon analysis of firms with similar projects,KT has determined that an unlevered cost of equity of 12% is suitable for their project.KT's corporate tax rate is 21%,its borrowing rate is 7%,and KT does not believe that its borrowing rate will change if the new project is accepted.
-If KT expects to maintain a debt to equity ratio for this project of 1 then KT's project-based WACC,rwacc,for this project is closest to:
A)11.3%.
B)10.8%.
C)9.6%.
D)10.5%.

Question

Quizplus · Accepted Answer

The correct answer is A because the project-based WACC, rwacc, for this project is closest to 11.3%. This is calculated as follows:rwacc = (E/V) * re + (D/V) * rd * (1 - Tc)where:E/V = equity ratio = 0.5D/V = debt ratio = 0.5re = unlevered cost of equity = 12%rd = borrowing rate = 7%Tc = corporate tax rate = 21%Plugging in these values, we get:rwacc = (0.5) * 12% + (0.5) * 7% * (1 - 0.21)rwacc = 6% + 3.57%rwacc = 11.3%

Use the Information for the Question(s)below