Question

Sixx am manufacturing has a target debt–equity ratio of 0.55. Its cost of equity is 19 percent, and its cost of debt is 8 percent. If the tax rate is 38 percent, what is the company's WACC?

Answer 1

To calculate the WACC for Sixx am manufacturing, use the formula: WACC = (E/V) * Ke + (D/V) * Kd * (1 - Tax Rate), where E is the market value of equity, V is the total market value of equity and debt, Ke is the cost of equity, D is the market value of debt, Kd is the cost of debt, and Tax Rate is the corporate tax rate.

Step-by-step explanation:

To calculate the Weighted Average Cost of Capital (WACC), we need to consider the cost of equity and the cost of debt. The formula for WACC is:

WACC = (E/V) * Ke + (D/V) * Kd * (1 - Tax Rate)

Where:

• E = Market value of equity
• V = Total market value of equity and debt
• Ke = Cost of equity
• D = Market value of debt
• Kd = Cost of debt
• Tax Rate = Corporate tax rate

In this case, the target debt-equity ratio is given as 0.55, so the equity portion is 0.45. Let's assume the market value of equity is $100 million and the market value of debt is $55 million. Plug in the values and solve:

WACC = (0.45 * 19%) + (0.55 * 8%) * (1 - 38%)

Calculating this equation will give you the WACC for Sixx am manufacturing.