Cruiseliners, Inc. has 230,000 shares of common stock outstanding at a market price of $40 a share. Next quarter, Cruiseliners' is expected to pay an annual dividend in the amount of $1.80 per share. The dividend growth rate is 3 %. Cruiseliners' also has 8,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 9 % coupon, pay interest annually, and mature in 5.093 years. The bonds are selling at 102 % of face value. The company's tax rate is 35 %. What is Cruiseliners' weighted average cost of capital?

A) 5.4 %
B) 6.6 %
C) 7.5 %
D) 8.5 %
E) 9.6 %

To calculate the weighted average cost of capital (WACC), we need to find the cost of equity and the cost of debt, and then weight them according to the market value of equity and debt.1. **Cost of Equity (using the Dividend Discount Model for a growing dividend):** $$\text{Cost of Equity}=\frac{D_1}{P_0}+g$$ Where $D_1$ is the dividend next year, $P_0$ is the current price of the stock, and $g$ is the growth rate of the dividend. $$D_1=1.80$$$$P_0=40$$$$g=3\%=0.03$$$$\text{Cost of Equity}=\frac{1.80}{40}+0.03=0.045+0.03=0.075\text{ or }7.5\%$$ 2. **Cost of Debt:**The bonds are selling at 102% of face value, so the market price of a bond is $102\%\times 1000=\$1020$ .The annual interest payment is $9\%\times 1000=\$90$ .Since the bonds are selling at a premium and we're not given the yield to maturity, we'll approximate the cost of debt using the coupon rate, which is a common simplification in some scenarios. $$\text{Cost of Debt}=\frac{\text{Annual Interest Payment}}{\text{Market Price of Bond}}=\frac{90}{1020}=0.0882\text{ or }8.82\%$$ However, we need to adjust this for taxes, since interest payments are tax-deductible. $$\text{After-Tax Cost of Debt}=\text{Cost of Debt}\times (1-\text{Tax Rate})=0.0882\times (1-0.35)=0.05733\text{ or }5.733\%$$ 3. **Calculating WACC:** $$\text{WACC}=\frac{E}{V}\times \text{Cost of Equity}+\frac{D}{V}\times \text{Cost of Debt}\times (1-\text{Tax Rate})$$ Where $E$ is the market value of equity, $D$ is the market value of debt, and $V$ is the total market value (E + D). $$E=230,000\times 40=\$9,200,000$$$$D=8,000\times 1020=\$8,160,000$$$$V=\$9,200,000+\$8,160,000=\$17,360,000$$$$\text{WACC}=\frac{\$9,200,000}{\$17,360,000}\times 7.5\%+\frac{\$8,160,000}{\$17,360,000}\times 5.733\%$$$$\text{WACC}\approx 0.530\times 0.075+0.470\times 0.05733\approx 0.03975+0.02695\approx 0.0667\text{ or }6.67\%$$ The closest answer is 6.6%, which is option B.