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johnpaech johnpaech
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4 years ago
Rearden Metal currently has no debt and an equity cost of capital of 14%. Suppose that Rearden decides to increase its leverage and maintain a market debt-to-value ratio of 1/2. Suppose Rearden's debt cost of capital is 8% and its corporate tax rate is 40%. Assuming that Rearden's pre-tax WACC remains constant, then with the addition of leverage its effective after-tax WACC will be closest to:
A) 10.8%
B) 12.4%
C) 12.8%
D) 13.4%
Textbook 

Corporate Finance: The Core


Edition: 4th
Authors:
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anicidanicid
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4 years ago
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B
Explanation:  B) rWACC =   re +   rd -   rdTe = 14% -  (8%)(40%) = 12.40%
Note that =   re +   rd is the pre-tax WACC.
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