Suppose that Model Nails, Inc.'s capital structure features 60 percent equity, 40 percent debt, and that its before-tax cost of debt is 6 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 21 percent, what will be Model Nails' WACC?
A) 7.90 percent
B) 6.84 percent
C) 8.40 percent
D) 16.00 percent

Question

Quizplus · Accepted Answer

The WACC (Weighted Average Cost of Capital) is calculated as follows: WACC = E/V * Re + D/V * Rd * (1 - Tc), where E is the market value of the equity, D is the market value of the debt, V is the total value (E + D), Re is the cost of equity, Rd is the cost of debt, and Tc is the corporate tax rate. Plugging in the given values: WACC = 0.6 * 10% + 0.4 * 6% * (1 - 0.21) = 6% + 1.9% = 7.9%.

Suppose That Model Nails, Inc