Determine the WACC for Cranston Retail Inc.the firm has a before-tax cost of debt of 6.50%,a cost of equity of 11.50%,and a tax rate of 30.00%.The firm finances 40% of its assets with debt and 60% with equity.Further the risk-free rate is 3.00% and the firm has a beta of 1.20.

Question

Quizplus · Accepted Answer

First, we need to calculate the after-tax cost of debt:

After-tax cost of debt = before-tax cost of debt x (1 - tax rate)
After-tax cost of debt = 6.50% x (1 - 0.30)
After-tax cost of debt = 4.55%

Next, we can use the following formula to calculate the WACC:

WACC = (wD x RD x (1 - T)) + (wE x RE)
where:
wD = weight of debt = 40%
wE = weight of equity = 60%
RD = after-tax cost of debt = 4.55%
RE = cost of equity = 11.50%
T = tax rate = 30%

WACC = (0.40 x 4.55% x (1 - 0.30)) + (0.60 x 11.50%)
WACC = 8.72%

Therefore, the best choice is B, 8.72%.