Cadmium Electronics Inc. currently has a capital structure that is 40% debt and 60% equity. If the firm's cost of equity is 12%, the cost of debt is 8%, the risk-free rate is 3% and the firm pays no tax, what is the appropriate WACC?
A) 8.4%
B) 9.6%
C) 10.4%
D) 9.2%

Question

Quizplus · Accepted Answer

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)
where:
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
Re = cost of equity
Rd = cost of debt
Tc = corporate tax rate (assumed to be 0 for this question)

Given:
Debt = 40% of capital structure
Equity = 60% of capital structure
Cost of equity (Re) = 12%
Cost of debt (Rd) = 8%
Risk-free rate = 3%
Corporate tax rate (Tc) = 0

Using the formula above, we can calculate the WACC:
WACC = (0.6 * 0.12) + (0.4 * 0.08) 
WACC = 0.072 + 0.032 
WACC = 0.104 or 10.4%

Therefore, the appropriate WACC for Cadmium Electronics Inc. with the given information is 10.4% (option C).