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?

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Business

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27 May, 23:43

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?

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Pierce · Answer 1

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.