The Pollos Chicken Company farms chickens for sale to grocery retailer

The Pollos Chicken Company farms chickens for sale to grocery retailers. Pollos is all equity financed and its shareholders require a return of 7%. Gus Poultry Inc farms chickens for sale to fast food restaurants.

Gus Poultry has 20% debt in its capital structure (debt-to-equity is 0.25), and its cost of debt is 4%. What is Gus’s WACC? Assume that the tax rate is 0%.
A) 6.6%
B) 6.4%
C) 7.0%
D) 7.2%
E) 7.4%

ANSWER

C