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Calculating WACC. Reactive Industries has the following capital structure. Its corporate tax rate is 35 percent. What is its WACC?

Security Market Value Required Rate of Return
Debt $20 million 6%
Preferred stock $10 million 8%
Common stock $50 million 12%

When corporations need to raise funds through stock issues, do they rely upon the:
A) primary market.
B) secondary market.
C) over-the-counter market.
D) centralized NASDAQ exchange

Do the concept of compound interest refers to:
A) earning interest on the original investment.
B) payment of interest on previously earned interest.
C) investing for a multi-year period of time.
D) determining the APR of the investment.

When projects are mutually exclusive, selection should be made according to the project with the:
A) longer life.
B) larger initial size.
C) highest IRR.
D) highest NPV.

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Solution Preview

The after tax cost of debt is 6% * (1 - 0.35) = 6% * 0.65 = 3.9%
The WACC is then 3.9% * 20/80 + 8% * 10/80 + ...

Solution Summary

This solution discusses calculating WACC, raising funds, compound interest and project selection.

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