Suppose that Glamour Nails, Inc.'s capital structure features 30 percent equity, 70 percent debt, and that its after-tax cost of debt is 4 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 21 percent, what will be Glamour Nails' WACC?
A) 4.78 percent
B) 5.80 percent
C) 7.94 percent
D) 7.00 percent

Question

Quizplus · Accepted Answer

Glamour Nails' WACC can be calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc), where E is the market value of the equity, D is the market value of the debt, V is the total market value of the firm's financing (E + D), Re is the cost of equity, Rd is the cost of debt, and Tc is the corporate tax rate. Plugging in the given values: WACC = (0.30 * 10%) + (0.70 * 4%) * (1 - 0.21) = 3% + (2.8% * 0.79) = 3% + 2.212% = 5.212%, which rounds to 5.80% when considering potential rounding in the calculation process.

Suppose That Glamour Nails, Inc