Taggart Transcontinental Currently Has No Debt and an Equity Cost

question 27

Multiple Choice

Taggart Transcontinental currently has no debt and an equity cost of capital of 16%.Suppose that Taggart decides to increase its leverage and maintain a market debt-to-value ratio of 1/3.Suppose Taggart's debt cost of capital is 9% and its corporate tax rate is 35%.Assuming that Taggart's pre-tax WACC remains constant,then with the addition of leverage its effective after-tax WACC will be closest to:

• A)12.9%
• B)13.0%
• C)15.0%
• D)16.0%

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