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 $15.00 per share and its most recent dividend was $1.00.Future dividends are expected to grow by 4%.If the tax rate is 34%,what is Plasti-tech's WACC?

Question

Quizplus · Accepted Answer

To calculate the WACC, we need to find the cost of equity and cost of debt.

Cost of Equity: 
D1 = $1.00 (Given)
G = 4% (Given)
P0 = $15.00 (Given)
Ke = (D1/P0) + G = (1/15) + 0.04 = 0.1033 or 10.33%

Cost of Debt: 
Before-tax cost of debt = 12%
After-tax cost of debt = 12% x (1-0.34) = 7.92%

WACC = (E/V)Ke + (D/V)Kd(1-T)
E/V=60%
D/V=40%
Ke=10.33%
Kd=7.92%
T=0.34

WACC= (0.6 × 10.33%) + (0.4 × 7.92%) × (1 - 0.34) 
= 6.198% + 2.621% 
= 8.819%

Therefore, the answer is C) 9.73% (rounded to two decimal places)

Plasti-Tech Inc