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 34 percent, what will be TipsNToes' WACC?

Question

Alannah Mcmillan

Business

9 December, 01:10

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 34 percent, what will be TipsNToes' WACC?

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Answers (1)

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Quentin Dixon · Answer 1

9.564%

Explanation:

Given that,

Cost of Debt = 9%

Tax Rate = 34%

Weight of Debt = 60%

Cost of Equity = 15%

Weight of Equity = 40%

TipsNToes' WACC:

= [Cost of Debt * (1 - Tax Rate) * Weight of Debt] + [Cost of Equity * Weight of Equity ]

= [9 * (1 - 0.34) * 0.60] + (15 * 0.40)

= 9.564%

Therefore, the TipsNToes' WACC will be 9.564%