Answer: 6.50%

## Explanation To calculate the Weighted Average Cost of Capital (WACC), we need to follow these steps: **Step 1: Calculate the after-tax cost of debt** \[ \text{After-tax cost of debt} = \text{Before-tax cost of debt} \times (1 - \text{Tax rate}) \] \[ \text{After-tax cost of debt} = 5\% \times (1 - 0.30) = 5\% \times 0.70 = 3.5\% \] **Step 2: Determine the weights of debt and equity** Given: Target debt-to-equity ratio = 50% = 0.5 This means: \[ \frac{\text{Debt}}{\text{Equity}} = 0.5 \] \[ \text{Debt} = 0.5 \times \text{Equity} \] Let Equity = 1, then Debt = 0.5 Total capital = Debt + Equity = 0.5 + 1 = 1.5 Weight of debt (w_d) = Debt / Total capital = 0.5 / 1.5 = 1/3 ≈ 0.3333 Weight of equity (w_e) = Equity / Total capital = 1 / 1.5 = 2/3 ≈ 0.6667 **Step 3: Calculate WACC** \[ \text{WACC} = (w_d \times \text{After-tax cost of debt}) + (w_e \times \text{Cost of equity}) \] \[ \text{WACC} = (\frac{1}{3} \times 3.5\%) + (\frac{2}{3} \times 8\%) \] \[ \text{WACC} = (0.3333 \times 3.5\%) + (0.6667 \times 8\%) \] \[ \text{WACC} = 1.1667\% + 5.3333\% \] \[ \text{WACC} = 6.50\% \] **Verification:** - After-tax cost of debt: 3.5% - Cost of equity: 8% - Debt weight: 33.33% - Equity weight: 66.67% - Weighted cost of debt: 3.5% × 0.3333 = 1.1667% - Weighted cost of equity: 8% × 0.6667 = 5.3333% - Total WACC: 1.1667% + 5.3333% = 6.50% Therefore, the correct answer is **B. 6.50%**.

Author: LeetQuiz .