Cookie Dough Manufacturing has a target debt-equity ratio of .76. Its cost of equity is 15.3 percent, and its pretax cost of debt is 9 percent. What is the WACC given a tax rate of 21 percent?

Question

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The correct answer is A.The WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - T)where:E = market value of equityV = market value of the firmRe = cost of equityD = market value of debtRd = cost of debtT = tax rateIn this case, we have:E/V = 1 / (1 + .76) = 0.5714D/V = .76 / (1 + .76) = 0.4286Re = 15.3%Rd = 9%T = 21%Plugging these values into the formula, we get:WACC = (0.5714 * 15.3%) + (0.4286 * 9% * (1 - 0.21))WACC = 11.76%

Cookie Dough Manufacturing Has a Target Debt-Equity Ratio of