Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the weighted average cost of capital for Zonk based on the new capital structure.

A. 8.85%

B. 12.56%

C. 13.01%

D. 9.94%

Zonk Corporation Data

Total assets

$7,460

Interest-bearing debt

$3,652

Average pretax borrowing cost

10.5%

Common equity:

Book value

$2,950

Market value

$13,685

Income tax rate

35%

Market equity beta

1.13