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16 August, 20:25

Precision Cuts has a target debt-equity ratio of 0.55. Its cost of equity is 15.4 percent, and its pretax cost of debt is 7.8 percent. If the tax rate is 32 percent, what is the company's WACC?

A) 10.91 percent

B) 11.82 percent

C) 11.28 percent

D) 10.72 percent

E) 10.20 percent

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  1. 16 August, 20:51
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    B) 11.82 percent

    Explanation:

    WACC formula = wE*rE + wD*rd (1-tax)

    wE = weight of equity

    rE = cost of equity

    wD = weight of debt

    rd = pretax cost of debt

    If D/E = 0.55 / 1, then D+E = 0.55 + 1 = 1.55

    therefore wD = 0.55 / 1.55 = 0.3548 or 35.48%

    and wE = 1 / 1.55 = 0.6452 or 64.52%

    Next, plug in the numbers to the above WACC formula;

    WACC = (0.6452*0.154) + [0.3548 * 0.078 (1 - 0.32) ]

    = 0.0994 + 0.0188

    = 0.1182 or 11.82%

    Therefore, the company's WACC = 11.82%
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