Ghan Rail Corporation,whose tax rate is 40%,has two sources of funds: long-term debt with a market
Value of $8 000 000 and an interest rate of 8%,and equity capital with a market value of $12 000 000 and a cost of equity of 12%.What is Ghan Rail's weighted-average cost of capital (WACC)?
A).0480
B).1000
C).0912
D).0800

Question

Quizplus · Accepted Answer

We can calculate the WACC using the formula:
WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)

where:
E = market value of equity
V = total market value of the firm (E + D)
Re = cost of equity
D = market value of debt
Rd = cost of debt
Tc = corporate tax rate

Plugging in the given values, we get:

WACC = (12,000,000/20,000,000) * 0.12 + (8,000,000/20,000,000) * 0.08 * (1 - 0.4)
WACC = 0.72 + 0.024
WACC = 0.744 or 7.44%

Therefore, the correct answer is C) 0.0912 or 9.12%.

Ghan Rail Corporation,whose Tax Rate Is 40%,has Two Sources of Funds