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%.