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17 December, 05:41

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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  1. 17 December, 06:03
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    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%
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