Explanation

The Weighted Average Cost of Capital (WACC) is calculated using the formula:

$\text{WACC} = w_d \times r_d \times (1 - t) + w_e \times r_e$

Where:

• $w_d$ = weight of debt = 25% = 0.25
• $r_d$ = before-tax cost of debt = 4% = 0.04
• $t$ = marginal tax rate = 20% = 0.20
• $w_e$ = weight of equity = 75% = 0.75
• $r_e$ = cost of equity = 12% = 0.12

Step-by-step calculation:

1. After-tax cost of debt: $r_d \times (1 - t) = 0.04 \times (1 - 0.20) = 0.04 \times 0.80 = 0.032$ or 3.2%

2. Weighted cost of debt: $w_d \times \text{after-tax cost of debt} = 0.25 \times 0.032 = 0.008$ or 0.8%

3. Weighted cost of equity: $w_e \times r_e = 0.75 \times 0.12 = 0.09$ or 9.0%

4. Total WACC: $0.008 + 0.09 = 0.098$ or 9.8%

Verification: $\text{WACC} = (0.25 \times 0.04 \times 0.80) + (0.75 \times 0.12)$ $= (0.25 \times 0.032) + 0.09$ $= 0.008 + 0.09 = 0.098 = 9.8\%$

Therefore, the correct answer is A. 9.80%.

Why other options are incorrect:

• B. 10.00%: This would be the result if you forgot to account for the tax shield on debt (i.e., used before-tax cost of debt without tax adjustment).
• C. 10.25%: This might result from incorrectly calculating the tax effect or using wrong weights.