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1 July, 13:22

Weighted average cost of capital American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently it targets a 50 -50 mix of debt and equity, but it is considering a target capital structure with 70 % debt. American Exploration currently has 6 % after-tax cost of debt and a 12 % cost of common stock. The company does not have any preferred stock outstanding. What is American Explorations current WACC?

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  1. 1 July, 15:57
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    American Explorations current WACC is 9%

    Explanation:

    The computation of WACC is shown below:

    = (Cost of equity * equity percentage) + (after-tax cost of debt * debt percentage)

    = (12% * 50%) + (6% * 50%)

    = 6% + 3%

    = 9%

    Since we have to compute only current WACC so we considered the 50-50 ratio. Hence, we ignored 70% cost of debt

    WACC shows a relationship between debt, equity and the preferred stock.
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