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Homework answers / question archive / Suppose that TipsNToes, Inc
Suppose that TipsNToes, Inc.'s capital structure features 40 percent equity, 60 percent debt, and that its before-tax cost of debt is 9 percent, while its cost of equity is 15 percent. If the appropriate weighted average tax rate is 21 percent, what will be TipsNToes' WACC? A) 9.36 percent B) 10.27 percent C) 11.84 percent D) 24.00 percent
WACC is weighted avg cost of sources of finance in capital structure.
After tax cost of debt = Cost ofdebt ( 1 - Tax Rate )
= 9% ( 1 - 0.21 )
= 9% * 0.79
= 7.11%
WACC:
| Source | Weight | Cost | Weighted Cost |
| Debt | 0.6000 | 7.11% | 4.27% |
| Equity | 0.4000 | 15.00% | 6.00% |
| WACC | 10.27% |
Option B is correct.
