Suppose that Glamour Nails, Inc.'s capital structure features 30 percent equity, 70 percent debt, and that its before-tax cost of debt is 4 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 34 percent, what will be Glamour Nails' WACC?
A)4.78 percent
B)4.85 percent
C)5.80 percent
D)7.00 percent

Question

Quizplus · Accepted Answer

The WACC is calculated as follows: 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 = (0.3 * 10%) + (0.7 * 4% * (1 - 0.34)) = 3% + 1.848% = 4.85%.

Suppose That Glamour Nails, Inc