Detailed Answer
Answer (B) is correct. The effective rate for Angela’s debt is the after-tax cost [8% × (1.0 – .40 tax rate) = 4.8%]. The formula for weighted-average cost of capital can be solved as follows: (Debt weight × Cost of debt) + (Equity weight × Cost of equity) = WACC (Debt weight ×.048) + (Equity weight × .15) = .1041 [(1 – Equity weight) × .048] + (Equity weight × .15) = .1041 .048 – (.048 × Equity weight) + (Equity weight × .15) = .1041 – (.048 × Equity weight) + (Equity weight × .15) = .0561 Equity weight × .102 = .0561 Equity weight = .55 Since equity is 55% of the capital structure, debt makes up 45%.