Clothier,Inc.has a target capital structure of 40% debt and 60% common equity,and has a 40% marginal tax rate.If Clothier's yield to maturity on bonds is 7.5% and investors require a 15% return on Clothier's common stock,what is the firm's weighted average cost of capital?
A) 7.20%
B) 10.80%
C) 12.00%
D) 12.25%

Question

Quizplus · Accepted Answer

The WACC is calculated as: WACC = (E/V * Re) + (D/V * Rd * (1-Tc)), where E/V is the proportion of equity, Re is the cost of equity, D/V is the proportion of debt, Rd is the cost of debt, and Tc is the tax rate. Substituting the given values: WACC = (0.60 * 15%) + (0.40 * 7.5% * (1-0.40)) = 9% + 1.8% = 10.80%.