Lannister Manufacturing has a target debtequity ratio of .45. Its cost of equity

Question

Lannister Manufacturing has a target debtequity ratio of .45. Its cost of equity is 13 percent, and its cost of debt is 7 percent. If the tax rate is 34 percent, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Lannister Manufacturing has a target debtequity ratio of .45. Its cost of equity is 13 percent, and its cost of debt is 7 percent. If the tax rate is 34 percent, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Target debt-equity ratio = 0.45

Hence, Debt/Equity = 0.45:1

Weight of debt = 0.45

Weight of equity = 1

Cost of equity = 13%

Cost of debt = 7%

Post tax cost of debt = 7% * ( 1 – 0.34) = 4.62%

Weighted average cost of capital (WACC) = (1 * 13%) + (0.45 * 4.62%) = 15.08%

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