Series 79 practice questionhardInterest Rate Impact
A company has a capital structure of 70% equity and 30% debt. Its cost of equity is 11%, pre-tax cost of debt is 7%, and the corporate tax rate is 30%. If market interest rates rise, increasing the pre-tax cost of debt to 9%, what is the new WACC?
- A9.6%✓ Correct answer
- B9.1%
- C8.0%
- D8.3%
Explanation
Why A — 9.6%
WACC = (E/V x Re) + (D/V x Rd x (1 - T)). With 70% equity at 11% and 30% debt at a new pre-tax cost of 9% with a 30% tax rate, WACC = (70% x 11%) + (30% x 9% x 70%) = 7.70% + 1.89% = 9.59%, which rounds to 9.6%.
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