LipTea Incorporated purchases raw materials and has processing plants around the world. The firm has an average pre-tax cost of debt of 8%, an average tax rate of 40%, and an international equity beta of 1.2. The risk-free rate of return is anticipated to be 4% and the return to the international market portfolio to be 12%. If the firm finances 40% with debt and 60% with equity, what is the after-tax WACC?
A) 10.08%
B) 12.96%
C) 11.36%
D) 10.50%

Question

Quizplus · Accepted Answer

The after-tax WACC is calculated as follows: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc), where Re = risk-free rate + beta * (market return - risk-free rate). Re = 4% + 1.2 * (12% - 4%) = 13.6%. Rd = 8% * (1 - 0.4) = 4.8%. WACC = 0.6 * 13.6% + 0.4 * 4.8% = 10.08%.

LipTea Incorporated Purchases Raw Materials and Has Processing Plants Around