Suppose that Glamour Nails, Inc.'s capital structure features 30 percent equity, 70 percent debt, and that its before-tax cost of debt is 4 percent, while its cost of equity is 10 percent. If the appropriate weighted average tax rate is 34 percent, what will be Glamour Nails' WACC?
A) 4.78%
B) 4.85%
C) 5.80%
D) 7.00%

Question

Quizplus · Accepted Answer

To calculate the WACC, we will use the following formula:

WACC = (E/V) x Re + (D/V) x Rd x (1 - T)

Where:
E = market value of the firm's equity 
V = total market value of the firm (E + D) 
D = market value of the firm's debt 
Re = cost of equity 
Rd = cost of debt 
T = tax rate

Given:
- E/V = 30%
- D/V = 70%
- Rd = 4%
- Re = 10%
- T = 34%

We can calculate the WACC as follows:

WACC = (0.3 x 0.1) + (0.7 x 0.04 x 0.66)
WACC = 0.0855 or 8.55%

Therefore, the best answer is B as it is the closest option to our calculated WACC.

Suppose That Glamour Nails, Inc