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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Definitions:

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including material, labor, and overhead costs.

Comparative Balance

A financial statement that presents the financial position of a company at two or more different points in time, for the purpose of evaluating financial health and performance.

Direct Method

A cash flow statement preparation approach that lists major categories of gross cash receipts and payments.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including materials and labor.