M&M Proposition 2: Alto Pet Ltd. currently has a capital structure that is 40% debt and 60% equity. If the company's cost of equity is 12%, the cost of debt is 8%, and the risk-free rate is 3%, what is the appropriate WACC?

Question

Quizplus · Accepted Answer

First, we need to calculate the weighted cost of debt and the weighted cost of equity.
Weighted cost of debt = debt/equity + debt * cost of debt
= 0.4/0.6 + 0.4 * 0.08
= 0.1333

Weighted cost of equity = equity/equity + debt * cost of equity
= 0.6/0.6 + 0.4 * 0.12
= 0.104

Then, we can calculate the WACC as follows:
WACC = 0.1333 * 0.4 + 0.104 * 0.6
= 0.052 + 0.0624
= 0.1144

Finally, we convert the decimal to a percentage to get the answer: 
WACC = 11.44%, which is closest to option C (10.4%).