The Guys and Cinderella Store has a cost of equity of 15.8 percent, a pretax cost of debt of 7.7 percent, and a tax rate of 35 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is 0.40?

Start by determining the after-tax cost of debt

Then since Debt / Equity = 0.40

Debt = 0.40 * Equity

Use: Equity + Debt = 1 (This means their weights equal to one)

Then substituting:

Equity + 0.40 * Equity = 1

1.40 Equity = 1

Equity = 1/1.40 (Is the weight of equity)

Then determine the weight of Debt and then combine the weights with the cost of equity and the afte-tax cost of debt