Answer: 11.4%

## Explanation To calculate the Weighted Average Cost of Capital (WACC), we use the formula: \[ \text{WACC} = w_d \times r_d \times (1 - t) + w_e \times r_e + w_p \times r_p \] Where: - \( w_d \) = proportion of debt = 40% = 0.40 - \( r_d \) = before-tax cost of debt = 8% = 0.08 - \( t \) = marginal tax rate = 25% = 0.25 - \( w_e \) = proportion of equity = 50% = 0.50 - \( r_e \) = cost of equity = 16% = 0.16 - \( w_p \) = proportion of preferred shares = 10% = 0.10 - \( r_p \) = cost of preferred shares = 10% = 0.10 **Step-by-step calculation:** 1. **After-tax cost of debt:** \( r_d \times (1 - t) = 0.08 \times (1 - 0.25) = 0.08 \times 0.75 = 0.06 \) or 6% 2. **Weighted cost of debt:** \( w_d \times r_d \times (1 - t) = 0.40 \times 0.06 = 0.024 \) or 2.4% 3. **Weighted cost of equity:** \( w_e \times r_e = 0.50 \times 0.16 = 0.08 \) or 8% 4. **Weighted cost of preferred shares:** \( w_p \times r_p = 0.10 \times 0.10 = 0.01 \) or 1% 5. **Total WACC:** \( 0.024 + 0.08 + 0.01 = 0.114 \) or 11.4% **Verification:** - Debt component: 40% × 6% = 2.4% - Equity component: 50% × 16% = 8% - Preferred component: 10% × 10% = 1% - Total: 2.4% + 8% + 1% = 11.4% Therefore, the company's WACC is **11.4%**, which corresponds to option B. **Why not the other options?** - **A. 11.2%**: This would result from forgetting to adjust the debt cost for taxes or making a calculation error. - **C. 12.2%**: This would result from using the before-tax cost of debt (8%) instead of the after-tax cost (6%), giving: 40%×8% + 50%×16% + 10%×10% = 3.2% + 8% + 1% = 12.2%.

Author: LeetQuiz .