Xyz corporation's capital structure consists of 60% debt (with a pretax cost of 10%), and the balance of common equity (with a cost of 12%). the company's income tax rate (federal and state combined), t, is 40%. xyz's weighted-average cost of capital (wacc), to one decimal point, is:

Weighted Average Cost of Capital = 8.40%

Explanation:

Weights of Debt = 60%

Weight of Equity = (100% - 60%) = 40%

Pretax Cost of Debt = 10%

Tax Rate = 40%

After Tax Cost of Debt = ( 100% - 40% ) x 10% = 6%

Cost of Equity = 12%

Weighted Average Cost of Capital = Weight of Debt x After tax cost of Debt + Weight of Equity x Cost of Equity

WACC = 60% x 6% + 40% x 12% = 8.40%

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