Benson Manufacturing has an after-tax cost of debt of 7% and a cost of equity of 12%. If Benson is in a 30% tax bracket, and finances 40% of assets with debt, what is the firm's wacc?

Question

Quizplus · Accepted Answer

The correct answer is A because the WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)where:E = market value of equityV = total value of the firmRe = cost of equityD = market value of debtRd = cost of debtTc = corporate tax rateIn this case, we have:E/V = 1 - D/V = 1 - 0.40 = 0.60Re = 12%D/V = 0.40Rd = 7%Tc = 30%Therefore, the WACC is:WACC = (0.60) * 12% + (0.40) * 7% * (1 - 0.30)= 11.20%

Benson Manufacturing Has an After-Tax Cost of Debt of 7