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 28 percent, what will be Model Nails' WACC?
A) 7.73%
B) 8.00%
C) 8.40%
D) 16.00%

Question

Quizplus · Accepted Answer

The WACC is calculated as: WACC = E/V * Re + D/V * Rd * (1 - Tc), where E is equity, V is total value, Re is cost of equity, D is debt, Rd is cost of debt, and Tc is tax rate. Substituting the given values: WACC = 0.6 * 10% + 0.4 * 6% * (1 - 0.28) = 7.73%.

Suppose That Model Nails, Inc