Use the following information to answer the question(s)below.
Rearden Metal is evaluating a project that requires an investment of $150 million today and provides a single cash flow of $180 million for sure one year from now.Rearden decides to use 100% debt financing for this investment.The risk-free rate is 5% and Rearden's corporate tax rate is 21%.Assume that the investment is fully depreciated at the end of the year.
-The WACC for this project is closest to:
A)4.0%.
B)5.0%.
C)7.0%.
D)8.2%.

Question

Quizplus · Accepted Answer

Since the project is 100% debt-financed, the WACC is the after-tax cost of debt. The cost of debt is the risk-free rate of 5%, and the after-tax cost of debt is 5% * (1 - 0.21) = 3.95%, which is closest to 4.0%.

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