Assume the following data for U&P Company: Debt (D) = $100 million; Equity (E) = $300 million; r_D = 6%; r_E = 12%; and T_C = 30%.Calculate the after-tax weighted average cost of capital (WACC): A)10.5 percent B)15 percent C)10.05 percent D)9.45 percent

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of equity (rs) using the capital asset pricing model (CAPM):
rs = rf + β × (rm - rf)
Assuming the risk-free rate (rf) to be 3%, the market risk premium (rm - rf) to be 8%, and the beta (β) to be 1, we get:
rs = 3% + 1 × 8% = 11%
Next, we need to calculate the after-tax cost of debt (rd):
Assuming a tax rate (T) of 30%, we get:
rd = 6% × (1 - 30%) = 4.2%
Finally, we can calculate the WACC using the weights of debt (D) and equity (E):
WACC = (D / (D + E)) × rd × (1 - T) + (E / (D + E)) × rs
WACC = (100 / (100 + 300)) × 4.2% × (1 - 30%) + (300 / (100 + 300)) × 11%
WACC = 10.05%
Therefore, the correct answer is C, 10.05 percent.

Assume the Following Data for U&P Company: Debt (D) =