Final answer:
The weighted average cost of capital (WACC) for Zonk Corp based on the new capital structure is calculated to be 11.08%, which does not match any of the provided options. This calculation takes into account the market value of debt and equity, the cost of debt, the cost of equity, and the corporate tax rate.
Step-by-step explanation:
The weighted average cost of capital (WACC) for Zonk Corp based on the new capital structure, which includes 80 percent debt with a pretax borrowing cost of 14 percent and 20 percent common equity, is determined using the following formula:
WACC = E/V × Re + D/V × Rd × (1 - Tc)
Where:
- E = Market value of equity
- D = Market value of debt
- Re = Cost of equity
- Rd = Cost of debt
- Tc = Corporate tax rate
- V = E + D
Calculating each component:
- E = 20% × $13,685 million = $2,737 million
- D = 80% × $7,460 million = $5,968 million
- Re = 1.13 × (0.14 - 0.035) + 0.035 = 0.15335 or 15.335% (assuming a risk-free rate of 3.5% and market risk premium of 10.5%)
- Rd = 14%
- V = $2,737 million + $5,968 million = $8,705 million
Applying the WACC formula:
WACC = ($2,737/$8,705) × 15.335% + ($5,968/$8,705) × 14% × (1 - 0.35)
WACC = 0.314303 × 15.335% + 0.685696 × 14% × 0.65
WACC = 4.8182% + 6.2643%
WACC = 11.0825% or 11.08% when rounded
The correct answer out of the provided options is therefore not listed, as the calculated WACC of 11.08% does not match any options (a) 7.26%, (b) 7.28%, (c) 8.94%, or (d) 9.94%.