Lannister Manufacturing has a target debt-equity ratio of .25. Its cost of equity is 13 percent,...

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Question

Lannister Manufacturing has a target debt-equity ratio of .25. Its cost of equity is 13 percent, and its cost of debt is 6 pe

Answer 1

Answer #1

Debt-equity ratio=debt/equity

Hence debt=0.25*equity

Let equity be $x

Debt=$0.25x

Total=$1.25x

After-tax cost of debt=6*(1-tax rate)

=6*(1-0.22)=4.68%

WACC=Respective costs*Respective weight

=(x/1.25x*13)+(0.25x/1.25x*4.68)

=11.34%(Approx).

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Answer 2

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