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Lannister Manufacturing has a target debt-equity ratio of .55. Its cost of equity is 10 percent, and its cost of debt is 6 percent. If the tax rate is 21 percent, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Respuesta :

Answer:

The company WACC is 8.13%

Explanation:

For computing the WACC, first we have to find the weight-age of both debt and equity.

Since in the question it is given that the debt equity ratio 0.55, that means debt is 0.55 and equity is 1, and the sum is 1.55

So, the weight-age of debt = debt ÷ sum of total debt and equity which is equals to

= 0.55 ÷ 1.55

= 0.3548

And, the weight-age of equity = equity ÷ sum of total debt and equity which is equals to

= 1 ÷ 1.55

= 0.6452

Now, we can easily compute the WACC. The formula is shown below

= Weighted of debt × cost of debt × (1- tax rate) + Weighted of equity × cost of equity

= 0.3548 × 0.06 × (1 - 0.21) + 0.6452 × 0.10

= 0.01681752 + 0.06452

= 8.13%

Hence, the company WACC is 8.13%

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