Suppose that T-shirts, Inc.'s capital structure features 25 percent equity, 75 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 12 percent. If the appropriate weighted average tax rate is 30 percent, what will be T-shirts' WACC?
A)9.00 percent
B)7.20 percent
C)5.10 percent
D)4.75 percent

Question

Quizplus · Accepted Answer

WACC = (E/V)*Re + (D/V)*Rd*(1-T)

where E= equity, D=debt, V=total value of firm

Given:

E/V = 0.25, D/V = 0.75

Re = 12%

Rd = 8%

T = 30%

WACC = (0.25*12%) + (0.75*8%*(1-30%))
WACC = 7.20%

Suppose That T-Shirts, Inc