Transitions Inc. is an import-export company specializing in products from Asia and the West Coast. It can borrow in the debt market at 8%. Its cost of equity with 40% D/V ratio is 12%. Its corporate tax rate is 30%
If the M&M world of taxes holds true, what is the WACC for Transitions Inc. with a 40% D/V financing?
A) 7.20%
B) 8.00%
C) 8.64%
D) 9.44%
Answer: D
Explanation: D) WACC = × Re + × Rd × (1 - Tc) = .60 × 12% + .40 × 8% × (1 - 0.3) = 7.20% + 2.24% = 9.44%.
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