Plasti-tech Inc.is financed 60% with equity and 40% with debt.Currently, its debt has a before-tax interest rate of 12%.Plasti-tech's common stock trades at $15 per share and its most recent dividend was $1.00.Future dividends are expected grow by 4%.If the tax rate is 34%, what is Plasti-tech's WACC?

Question

Quizplus · Accepted Answer

To find Plasti-tech's WACC, we need to calculate the cost of equity and the cost of debt, and then use the weighted average of the two.

Cost of Equity:
rS = (D1 / P0) + g
rS = ($1.04 / $15) + 0.04
rS = 0.1093 or 10.93%

Cost of Debt:
rd = 12%

Weighted Average Cost of Capital:
WACC = (E / V) * rS + (D / V) * rd * (1 - T)
WACC = (0.6 * 0.1093) + (0.4 * 0.12 * (1 - 0.34))
WACC = 0.0656 + 0.0312
WACC = 0.0968 or 9.73%

Therefore, the best choice is C, with a WACC of 9.73%.

Plasti-Tech Inc