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INK Ltd is grocery retailer with 103 shops around South Australia and Tasmania. The company has...

INK Ltd is grocery retailer with 103 shops around South Australia and Tasmania. The company has no debt and an equity cost of capital of 12%. The industry average debt-tovalue ratio is 50%. The company is subject to 30% corporate tax rate. What would its weighted average cost of capital (WACC) be if it took on the average amount of debt for its industry at a cost of debt of 6%?

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Answer #1

WACC = 0.50(0.06)(1 - 0.30) + 0.50(0.12)

WACC = 8.10%

So,

If the firm takes the debt,

WACC = 8.10%

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