Final answer:
To calculate Plasti-tech's WACC, the after-tax cost of debt and cost of equity using the Gordon Growth Model are found and weighted based on the firm's capital structure. The WACC is approximately 10.8% (option B).
Step-by-step explanation:
To calculate Plasti-tech's Weighted Average Cost of Capital (WACC), we need to consider the cost of equity and the after-tax cost of debt. Plasti-tech is financed with 65% equity and 35% debt. The debt has a before-tax cost of 8%, and given a tax rate of 40%, the after-tax cost of debt would be 0.08 * (1 - 0.40) = 4.8%.
To calculate cost of equity, we can use the Gordon Growth Model since we have the most recent dividend, growth rate of dividends, and the price of the stock. The Gordon Growth Model is: Cost of Equity = (D1 / P0) + g, where D1 is the dividend expected next year, P0 is the current stock price, and g is the growth rate of dividends. Therefore, Cost of Equity = (1.50 * 1.08) / 25 + 0.08 = 0.060 + 0.08 = 14%.
Now, to calculate WACC, we use the formula WACC = (E/V * Ke) + (D/V * Kd * (1 - T)), where E is the market value of equity, V is the total value of capital (equity plus debt), Ke is the cost of equity, D is the market value of debt, Kd is the cost of debt, and T is the tax rate. Plugging in the values, we have: WACC = (0.65 * 0.14) + (0.35 * 0.048) = 0.091 + 0.0168 = 10.78%, which rounding to one decimal place gives us 10.8%.