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Precision Cuts has a target debt-equity ratio of .48. Its cost of equity is 16.4 percent, and its pretax cost of debt is 8.2 percent. If the tax rate is 34 percent, what is the company's WACC?

a) 11.28 percent

b) 13.20 percent

c) 12.91 percent

d) 11.72 percent

e) 12.84 percent

Respuesta :

Answer:

e) 12.84 percent

Explanation:

The computation of the weighted average cost of capital is as follows:

= Pre-tax cost of debt × (1 - tax rate) × weight of debt + cost of equity × weight of equity

= 8.2% × (1 - 34%) × 0.48 ÷ 1.48 + 16.4% × 1 ÷ 1.48

= 12.84%

Hence, the weighted average cost of capital is 12.84%

Thus, the correct option is e.

We simply applied the above formula so that the correct value could come

And, the same is to be considered

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