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    PracticeCPA®CPA BAR Practice Exam 2Question 12
    Hard1 markMultiple Choice
    Area I: Business AnalysisBARArea ICapital Structure

    CPA · Question 12 · Area I: Business Analysis

    Calculate the Weighted Average Cost of Capital (WACC) given the following:<br/>- Target Capital Structure: 60% Equity, 40% Debt<br/>- Cost of Equity: 12%<br/>- Pre-tax Cost of Debt: 8%<br/>- Corporate Tax Rate: 25%

    Answer options:

    A.

    10.4%

    B.

    8.8%

    C.

    9.6%

    D.

    10.0%

    How to approach this question

    Apply WACC formula. Crucial step: Adjust cost of debt for taxes: Kd(after-tax) = Kd(pre-tax) * (1 - Tax Rate).

    Full Answer

    C.9.6%✓ Correct
    C
    After-tax cost of debt = 8% * (1 - 0.25) = 6%. Weighted Cost = (60% * 12%) + (40% * 6%) = 7.2% + 2.4% = 9.6%.

    Common mistakes

    Forgetting the tax shield on debt; using book values instead of target weights (if provided).
    Question 11All questionsQuestion 13

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