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11 January, 07:50

Protec Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 5.00%, the cost of preferred is 7.0%, and the cost of retained earnings is 11.50%. The firm will not be issuing any new stock. What is its WACC? 6.75% 7.18% 7.64% 7.93% 8.23%

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  1. 11 January, 08:15
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    The correct answer is 8.23%.

    Explanation:

    According to the scenario, the computation can be done as:

    WACC of debt = Respective costs of debt * Respective weight of debt

    = (0.4 * 5)

    = 2

    WACC of preferred = Respective costs of preferred * Respective weight of preferred

    = (0.15 * 7)

    = 1.05

    WACC of common equity = Respective costs of common equity * Respective weight of retained earning

    = (0.45 * 11.5)

    = 5.175

    So, Total WACC = WACC of debt + WACC of preferred + WACC of common equity

    = 2 + 1.05 + 5.175

    = 8.225 or 8.23 (approx.)
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