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Calculating WACC for American Widget Company

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American Widget company has total capital, consisting of long-term debt and common equity, of $120 million. Fifty million of total capital is in the form of long-term debt, which carries a cost of 10 percent. The company's equity carries a cost of 16 percent. If the company's tax rate is 35 percent, what is the WACC?

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Solution Summary

The solution explains how to calculate the WACC (Weighted Average Cost of Capital)

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WACC = Proportion of debt X cost of debt X (1-tax rate) + ...

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