Final answer:
Maverick Manufacturing's Weighted Average Cost of Capital (WACC) is calculated using the provided target debt-equity ratio, cost of equity, cost of debt, and tax rate. The WACC works out to be 2.8% after converting the result into a percentage and rounding to zero decimal places.
Step-by-step explanation:
The question focuses on calculating Maverick Manufacturing's Weighted Average Cost of Capital (WACC), which is a measure of the average rate of return a company is expected to pay its security holders to finance its assets. To calculate WACC, we need to consider the cost of equity, the cost of debt, the target debt-equity ratio, and the corporate tax rate. The formula for WACC is:
WACC = E/V * Re + D/V * Rd * (1 - Tc)
Where:
E = Market value of the equity
V = Total value of capital (equity + debt)
Re = Cost of equity
D = Market value of the debt
Rd = Cost of debt
Tc = Corporate tax rate
Given the target debt-equity ratio (D/E) of 0.65, we can express the market value of debt (D) as 0.65 times the market value of equity (E). Hence, V = E + D = E + 0.65E = 1.65E. Therefore, E/V = 1/1.65 and D/V = 0.65/1.65.
Using the provided values:
- Cost of equity (Re) = 15%
- Cost of debt (Rd) = 6%
- Corporate tax rate (Tc) = 39%
WACC can be calculated as follows:
WACC = (1/1.65) * 15% + (0.65/1.65) * 6% * (1 - 0.39)
WACC = 0.09091 * 15% + 0.393939 * 6% * 0.61
WACC = 0.0136365 + 0.014435754
WACC = 0.028072254
Converting to percentage and rounding to 0 decimal places:
WACC = 2.8%