XYZ Corporation's capital structure consists of 60% debt (with a pretax cost of 10%), and the balance of common equity (with a cost of 15%). The company's income tax rate (federal and state combined), t, is 40%. XYZ's weighted-average cost of capital (WACC), to one decimal point, is:
A) 8.4%.
B) 9.0%.
C) 9.6%.
D) 11.4%.
E) 12.0%.

Question

Quizplus · Accepted Answer

To calculate the WACC, we need to first calculate the weights of debt and equity:

Weight of debt = 60% 
Weight of equity = 40% (since debt + equity = 100%)

Next, we need to calculate the cost of debt after taxes:

Cost of debt after taxes = Pretax cost of debt x (1 - Tax rate) 
= 10% x (1 - 0.40) 
= 6%

Now we can calculate the WACC using the formula:

WACC = (Weight of debt x Cost of debt after taxes) + (Weight of equity x Cost of equity) 
= (0.6 x 0.06) + (0.4 x 0.15) 
= 0.036 + 0.06 
= 0.096 or 9.6%

Therefore, the best choice is C.

XYZ Corporation's Capital Structure Consists of 60% Debt (With a Pretax