Creative Industries Inc. is contemplating an acquisition of Flagstaff, which is in a different industry from that of Creative. Creative’s CFO is currently working on the valuation of Flagstaff. The estimated debt cost of capital for this acquisition is likely to be 7%, and both companies are in the 35% corporate tax bracket. Creative Industries intends to maintain a fixed debt-to-equity ratio of 1 after the acquisition. Creative’s current debt-to-equity ratio is 0.6. Creative industries currently has a cost of equity of 10%. Other firms in the same industry as Flagstaff with a debt-to-equity ratio of 1 have a cost of equity of 15%. 

What is the WACC for this acquisition?

Answer rating: 100% (QA)

We must first define the capital structures weights for debt and equity before calculating the costs ... View the full answer