Use the following information to answer the question(s)below.
Galt Industries is expected to generate free cash flows of $24 million per year.Galt has permanent debt of $80 million,a corporate tax rate of 21%,and an unlevered cost of capital of 12% and its cost of debt capital is 6%.
-Galt's WACC is closest to:
A)6.0%.
B)9.6%.
C)11.1%.
D)10.7%.

Question

Quizplus · Accepted Answer

To calculate WACC, we need to find the proportion of equity and debt in the capital structure.

Since we know Galt has $80 million of permanent debt, we can use this and the unlevered cost of capital to calculate the equity value using the WACC formula.

First, we find the cost of equity:
Cost of Equity = Unlevered Cost of Capital x (1 + Debt/Equity)

Debt/Equity = $80 million / ($80 million + Equity)

We can rearrange this to solve for equity:
Equity = $24 million / (0.12 - 0.21 x ($80 million / Equity))

We can then substitute this into the WACC formula:

WACC = (Equity / Total Capital) x Cost of Equity + (Debt / Total Capital) x Cost of Debt x (1 - Tax Rate)

Plugging in the values, we get:

WACC = ($299.67 million / ($299.67 million + $80 million)) x 17.31% + ($80 million / ($299.67 million + $80 million)) x 6% x (1 - 0.21)

WACC = 11.12%, which is closest to answer choice C (11.1%).

Use the Following Information to Answer the Question(s)below