Question

Lannister Manufacturing has a target debt-equity ratio of .85. Its cost of equity is 13 percent, and its cost of debt is 7 percent. If the tax rate is 21 percent, what is the companyâs WACC? (Do not round intermediate calculations and enter your

Answer 1

WACC 9.56784%

Step-by-step explanation:

`WACC = K_e((E)/(E+D)) + K_d(1-t)((D)/(E+D))`

We should remember that

Debt to Equity = D/E = 0.85

So D = 0.85

and E = 1

D + E = 1.85

Ke 0.13

Equity weight 1/1.85

Kd 0.07

Debt Weight 0.85/1.85

t 0.21

`WACC = 0.13(1/1.85) + 0.07(1-0.21)(0.85/1.85)`

WACC 9.56784%