Answer: 6.16%

## Explanation To calculate the Weighted Average Cost of Capital (WACC), we need to follow these steps: ### Step 1: Calculate Market Values 1. **Market value of equity**: - Share price = $60 - Shares outstanding = 10 million - Market value of equity = $60 × 10 million = $600 million 2. **Market value of debt**: - Given as $150 million 3. **Total market value of the firm**: - Total value = Market value of equity + Market value of debt - Total value = $600 million + $150 million = $750 million ### Step 2: Calculate Weights 1. **Weight of equity (wₑ)**: - wₑ = Market value of equity / Total value - wₑ = $600 million / $750 million = 0.80 or 80% 2. **Weight of debt (wₒ)**: - wₒ = Market value of debt / Total value - wₒ = $150 million / $750 million = 0.20 or 20% ### Step 3: Apply Tax Adjustment to Cost of Debt - Cost of debt (before tax) = 4% - Tax rate = 30% - After-tax cost of debt = Cost of debt × (1 - Tax rate) - After-tax cost of debt = 4% × (1 - 0.30) = 4% × 0.70 = 2.8% ### Step 4: Calculate WACC WACC = (wₑ × Cost of equity) + (wₒ × After-tax cost of debt) WACC = (0.80 × 7%) + (0.20 × 2.8%) WACC = (0.80 × 0.07) + (0.20 × 0.028) WACC = 0.056 + 0.0056 WACC = 0.0616 or 6.16% ### Step 5: Verify Calculation - Equity component: 80% × 7% = 5.60% - Debt component: 20% × 2.8% = 0.56% - Total: 5.60% + 0.56% = 6.16% **Key Points**: 1. Always use **market values** (not book values) for WACC calculations 2. Apply tax adjustment to the cost of debt 3. The weights must sum to 100% 4. The correct answer is **6.16%** (Option A)

Author: LeetQuiz .