Question

Suppose that TapDance, Inc.’s, capital structure features 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 13 percent. Assume the appropriate weighted average tax rate is 34 percent. What will be TapDance’s WACC?

Answer 1

Answer:

11.07%

Explanation:

The formula to compute WACC is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) + (Weightage of  common stock) × (cost of common stock)

= (0.25 × 8%) × ( 1 - 34%) +  (0.75 × 13%)

= 1.32% + 9.75%

= 11.07%

We simply multiply the weighatge with its capital structure so that the correct weightage cost of capital can come.