Michael wants to calculate the WACC for a company which has $6 million worth of debt outstanding with an interest rate of 7%. The company is expected to issue new debt at an interest rate of 8%. Assuming a tax rate of 40%, the company’s after‐tax cost of debt to be used in calculating the WACC is closest to:

A 4.8%.

explanation

After‐tax cost of debt = 0.08 x (1 − 0.4) = 4.8%

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