Question

Lannister Manufacturing has a target debt-equity ratio of .95. Its cost of equity is 11 percent, and its cost of debt is 7 percent. If the tax rate is 24 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.)

Answer 1

WACC= 5.6%

Step-by-step explanation:

Weighted average cost of capital is the average cost of all of the long-term types of finance used by a company weighted according to the that amount of finance used in relation to the total pool of fund

WACC = (Wd×Kd) + (We×Ke)

After-tax cost of debt = Before tax cost of debt× (1-tax rate)

Kd-After-tax cost of debt

Ke-Cost of equity

Wd-Weight f debt

We-Weight of equity

After tax cost of debt = (1-T)× Before-tax yield on debt

= (1-0.24)× 7

=5.32

Cost of equity = 11%

WACC = (Wd×Kd) + (We×Ke)

We= 5%, Wd= 95%

WACC= (5.32× 95%) + (11%× 5%)

= 5.6%

WACC= 5.6%