Question

Suppose that TapDance, Inc.'s capital structure features 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 9 percent, while its cost of equity is 14 percent. The appropriate weighted average tax rate is 21 percent. What will be TapDance's WACC?

Answer 1

11.33%

Step-by-step explanation:

Cost of debt (Cd) = 8% = 0.08

Cost of Equity (Ce) = 13% = 0.13

E = market value of firm's equity = 75% = 0.75

Market value of debt (D) = 25% = 0.25

Tax rate (T) = 21% = 0.21

WACC = (E/T0) *Ce + (D/T0) * Cd * (1-T)

= 0.75 * 0.13 + 0.25 * 0.08 * (1 - 0.21)

= 0.0975 + 0.0158

= 0.1133

= 0.1133 * 100%

= 11.33%