Rearden Metal currently has no debt and an equity cost of capital of 14%.Suppose that Rearden decides to increase its leverage and maintain a market debt-to-value ratio of 1/2.Suppose Rearden's debt cost of capital is 8% and its corporate tax rate is 40%.Assuming that Rearden's pre-tax WACC remains constant,then with the addition of leverage its effective after-tax WACC will be closest to:

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Quizplus · Accepted Answer

B)r_WACC= 11ea7cce_3ce1_32cc_928c_616c5f4ca52c_TB1626_11 r_{e +} 11ea7cce_3ce1_59dd_928c_5160fa0c02dd_TB1626_11 r_{d -} 11ea7cce_3ce1_59de_928c_eda88dd5a568_TB1626_11 r_dT_e= 14% - 11ea7cce_3ce1_59df_928c_8fd3bca4e187_TB1626_11 (8%)(40%)= 12.40% Note that = 11ea7cce_3ce1_80f0_928c_b9d091f7c8e5_TB1626_11 r_{e +} 11ea7cce_3ce1_80f1_928c_e12768e54bb3_TB1626_11 r_d is the pre-tax WACC.

Rearden Metal Currently Has No Debt and an Equity Cost