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QUESTION 1 Below is the capital structure for a firm. If the marginal tax rate is 20%, what is the weighted average cost of c
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Answer #1

WACC is represented as:

WACC = [Weight of debt * Cost of debt * (1 - Tax)] + [Weight of equity * Cost of equity]

Weight of debt and equity are based on market value of these components.

Weight of debt = $25 million/($25 million + $50 million) = 1/3

Weight of equity = $50 million/($25 million + $50 million) = 2/3

WACC = [1/3 * 5.5% * (1 - 20%)] + [2/3 * 9.60%]

WACC = 1.47% + 6.40%

WACC = 7.87%

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