Question

2. Quantitative Problem: Currently, Meyers Manufacturing Enterprises (MME) has a capital structure consisting of 35% debt and 65% equity. MME's debt currently has a 7% yield to maturity. The risk-free rate (r_RF) is 5%, and the market risk premium (r_M – r_RF) is 6%. Using the CAPM, MME estimates that its cost of equity is currently 11.3%. The company has a 40% tax rate.

What would be the company's new WACC if it adopted the proposed change in capital structure? Round your answer to 2 decimal places. Do not round intermediate calculations.

Answer 1

Weight of Debt = 35%
Before-tax Cost of Debt = 7.00%
Weight of Equity = 65%
Cost of Equity = 11.30%

WACC = Weight of Debt * Before-tax Cost of Debt * (1 - Tax Rate) + Weight of Equity *Cost of Equity
WACC = 0.35 * 7.00% * (1 - 0.40) + 0.65 * 11.30%
WACC = 1.47% + 7.35%
WACC = 8.82%