Suppose that T-shirts, Inc.'s capital structure features 25 percent equity, 75 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 12 percent. If the appropriate weighted average tax rate is 21 percent, what will be T-shirts' WACC?
A) 9.00 percent
B) 7.74 percent
C) 7.20 percent
D) 4.75 percent

Question

Quizplus · Accepted Answer

The Weighted Average Cost of Capital (WACC) 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 = E + D (the total market value of the firm's financing), 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 = 0.25 * 12% + 0.75 * 8% * (1 - 0.21) = 3% + 4.74% = 7.74%.

Suppose That T-Shirts, Inc