LipTea Incorporated purchases raw materials and has processi

LipTea Incorporated purchases raw materials and has processing plants around the world.
The firm has an average pre-tax cost of debt of 8%, an average tax rate of 40%, and an international equity beta of 1.2. The risk-free rate of return is anticipated to be 4% and the return to the international market portfolio to be 12%. If the firm finances 40% with debt and 60% with equity, what is the after-tax WACC?

10.08%

12.96%

11.36%

10.50%

Solution

Correct option is > 10.08%

Cost of debt After tax= Pretax cost of debt x (1-Tax rate)

Cost of debt After tax= 8% x (1-40%)

Cost of debt After tax = 4.80%

.

Cost of equity = Risk free rate + Beta x (Return on Market – Risk free rate)

Cost of equity = 4% + 1.2 x (12% - 4%)

Cost of equity = 13.60%

.

WACC after tax = Cost of equity x Weight of equity + After tax Cost of debt x Weight of debt

WACC after tax= 13.60% x 60% + 4.80% x 40%

WACC after tax = 10.08%