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Suppose that TapDance, Inc.’s capital structure features 70 percent equity and 30 percent debt, with a before-tax cost of debt of 10 percent and a cost of equity of 15 percent. The appropriate weighted average tax rate is 21 percent. What will be TapDance’s WACC? (Round your answer to 2 decimal places.)

Answer :

Final answer:

TapDance, Inc.'s weighted average cost of capital (WACC) is approximately 12.16%.

Explanation:

To calculate TapDance, Inc.'s WACC, we need to use the formula:

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tax Rate)

Given that TapDance, Inc.'s capital structure features 70 percent equity and 30 percent debt, we can calculate the weights:

  • Equity weight (E/V) = 70%
  • Debt weight (D/V) = 30%

Next, we need to determine the cost of equity (Re) and the cost of debt (Rd). The given information states that the before-tax cost of debt is 10 percent and the cost of equity is 15 percent.

Finally, we need to consider the appropriate weighted average tax rate, which is 21 percent.

Plugging in the values into the formula:

WACC = (0.70 * 0.15) + (0.30 * 0.10) * (1 - 0.21)

Calculating the expression:

WACC = 0.105 + 0.021 * 0.79

WACC = 0.105 + 0.01659

WACC ≈ 0.12159

Therefore, TapDance, Inc.'s WACC is approximately 12.16%.

Learn more about calculating wacc (weighted average cost of capital) here:

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