Answer (C) is correct . A firm’s weighted-average cost of capital (WACC) is derived by weighting the (after-tax) cost of each component of the financing structure by its proportion of the financing structure as a whole. Hi-Tech’s WACC can be calculated as follows: ? Component Component Weight Cost Totals Debt 40% × 5.4% = 2.16%+ Equity 60% × 12.0% = 7.20% ,9.36%
Answer (A) is incorrect because Improperly subtracting the effect of taxes from the cost of equity results in 6.48%.
Answer (B) is incorrect because Improperly subtracting the effect of taxes from equity, but not from debt, results in 7.92%.
Answer (D) is incorrect because Improperly using the before-tax cost of debt results in 10.80%.
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