Suppose that TipsNToes, Inc.'s capital structure features 40 percent equity, 60 percent debt, and that its before-tax cost of debt is 9 percent, while its cost of equity is 15 percent. If the appropriate weighted average tax rate is 21 percent, what will be TipsNToes' WACC?
A) 9.36 percent
B) 10.27 percent
C) 11.84 percent
D) 24.00 percent

Question

Quizplus · Accepted Answer

The WACC is calculated as: WACC = (E/V * Re) + (D/V * Rd * (1 - Tc)), where E is equity, V is total value (equity + debt), Re is cost of equity, D is debt, Rd is cost of debt, and Tc is tax rate. Substituting the given values: WACC = (0.4 * 15%) + (0.6 * 9% * (1 - 0.21)) = 6% + 4.27% = 10.27%.

Suppose That TipsNToes, Inc