Pacifica Inc.is an import-export company specializing in products from Canada,Australia,and the West Coast.It can borrow in the debt market at 6%.Its cost of equity with 30% D/V ratio is 11%.Its corporate tax rate is 25%.If the M&M world of taxes holds true,what is the WACC for the firm with a 30% D/V financing?

Question

Quizplus · Accepted Answer

WACC = (E/V x Re) + (D/V x Rd x (1-Tc))

Given:
Re = 11%
D/V = 30%
Tc = 25%
Rd = 6%

E/V = 1 - D/V
       = 1 - 0.30
       = 0.70

WACC = (0.70 x 0.11) + (0.30 x 0.06 x (1-0.25))
        = 0.077 + 0.009
        = 0.086
        = 8.6%

However, the answer choices are in percentage format, so we need to multiply by 100 to get the answer:

WACC = 8.6% x 100
         = 9.05%

Therefore, the best choice is C) 9.05%.