Final answer:
To calculate Einstein Engineering's WACC, we need to consider the weightings of debt and equity, as well as the costs of each. Using the given values, the WACC is 9%.
Step-by-step explanation:
To calculate Einstein Engineering's Weighted Average Cost of Capital (WACC), we need to consider the weightings of debt and equity, as well as the costs of each.
The formula for WACC is: WACC = (E/V) * Re + (D/V) * Rd * (1 - Tax Rate), where E is the market value of equity, V is the total market value of debt and equity, Re is the cost of equity, Rd is the cost of debt, and Tax Rate is the corporate tax rate.
We are given that Einstein Engineering has a target debt-equity ratio of 0.90, which means that for every dollar of equity, there is $0.90 of debt. Let's assume the market value of equity is $1, and the market value of debt is $0.90.
Using the given information:
E/V = 1 / (1 + 0.90) = 0.5263 (equity weight)
D/V = 0.90 / (1 + 0.90) = 0.4737 (debt weight)
Re = 0.14 (cost of equity)
Rd = 0.065 (cost of debt)
Tax Rate = 0.30 (tax rate)
Substituting these values into the WACC formula: WACC = (0.5263 * 0.14) + (0.4737 * 0.065 * (1 - 0.30)) = 0.09, or 9%.