Answer (D) is correct . The firm calculates its WACC as follows: Component Weighted Component Weight Cost Cost Long-term debt 40% × 8% × (1.0 – .35) = 2.08% Preferred stock 20% × 13% = 2.60% Common stock 40% × 17% = 6.80% 11.48%
Answer (A) is incorrect because This percentage assumes that dividends on common equity (instead of debt) are tax deductible, which is incorrect.
Answer (B) is incorrect because Using the complement of the tax rate, and assuming the debt rate was before tax rather than after tax results in 10.52%.
Answer (C) is incorrect because This percentage results from failing to take the tax effect of debt into account
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