Answer:
option (B) 9.10%
Explanation:
Data provided in the question:
Total market value of a company’s stock = $650 million
Total market value of the company’s debt = $150 million
Cost of Equity, ke = 10% = 0.10
Cost of Debt, kd = 8% = 0.08
Corporate tax rate, T = 35%
Now,
WACC = [tex]Kd \times(1-T)\times\frac{Debt}{Debt +Equity} + Ke\times\frac{Equity}{Debt +Equity}[/tex]
on substituting the respective value, we get
WACC = [tex]0.08\times(1-0.35)\times\frac{150\ million}{150\ million+650\ million } + 0.10\times\frac{650\ million }{150\ million +650\ million }[/tex]
= 0.08 × 0.65 × 0.1875 + 0.10 × 0.8125
= 0.00975 + 0.08125
= 0.091
or
= 0.091 × 100% = 9.10%
Hence,
The correct answer is option (B) 9.10%
