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Calculation of WACC and its components

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This question requires the calculation of the after-tax cost of debt, the cost of equity/capital using the capital asset pricing model (CAPM). The results of these calculations of the costs of the components of the company's capital structure are used along with their relative proportions to determine the weighted average cost of capital (WACC).

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Solution Summary

This problem illustrates the calculation of the components of WACC and then the computation of the WACC itself.

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The first step in calculating the after-tax WACC is calculating the cost of each component of the WACC.

The WACC is equal to the cost of each component multiplied by its weight (proportion of financing provided by that component).

First, we will calculate the after-tax cost of debt. This is equal to the interest rate (which is the cost) multiplied by 1 minus the tax rate. ...

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