To calculate the Weighted Average Cost of Capital (WACC), we use the formula:

$\text{WACC} = \left( \frac{E}{V} \times r_E \right) + \left( \frac{D}{V} \times r_D \times (1 - T) \right)$

Where:

• $E$ is the market value of equity (Weight of Equity in Total Capital Structure)
• $D$ is the market value of debt (Weight of Debt in Total Capital Structure)
• $V = E + D$ is the total value of capital (which is 100% in this case)
• $r_E$ is the cost of equity
• $r_D$ is the cost of debt (Pre-tax Yield on Debt)
• $T$ is the tax rate

Steps:

1. Calculate the Cost of Equity using the Capital Asset Pricing Model (CAPM): $r_E = \text{Risk Free Rate} + \beta \times (\text{Return on the Stock Market} - \text{Risk Free Rate})$

   Substituting the given values: $r_E = 3.5\% + 1.3 \times (9.0\% - 3.5\%) = 3.5\% + 1.3 \times 5.5\% = 3.5\% + 7.15\% = 10.65\%$

2. Weight of Debt (D/V) = 33%
   Weight of Equity (E/V) = 67%

3. Pre-tax Yield on Debt (r_D) = 5.0%

4. Tax rate (T) = 26.5%

Now, using these in the WACC formula:

$\text{WACC} = \left( 0.67 \times 10.65\% \right) + \left( 0.33 \times 5.0\% \times (1 - 0.265) \right)$

Let's compute this.The Weighted Average Cost of Capital (WACC) is approximately 8.35%.

Would you like more details or have any questions? Here are some related questions to explore further:

1. How does an increase in the tax rate affect the WACC?
2. What impact does a higher proportion of debt have on WACC?
3. How is the cost of equity calculated using the CAPM model?
4. Why is the after-tax cost of debt used in the WACC formula?
5. How can WACC influence a company's investment decisions?

Tip: A lower WACC generally indicates cheaper access to capital, which can encourage investment.