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:

Average Fixed Cost

Fixed production costs (expenses unaffected by output levels) divided over the produced output quantity.

Total Revenue

The overall amount of money generated by a business from its sales activities before any costs or expenses are subtracted.

Flight Attendants

Airline employees responsible for ensuring the safety, security, and comfort of passengers during flight.

Revenues

The entire sum of proceeds a company receives from transactions or services conducted over a specified period.