Question

Sixx AM Manufacturing has a target debt-equity ratio of 0.50. Its cost of equity is 15 percent, and its cost of debt is 6 percent. If the tax rate is 34 percent, what is the company's WACC? (Round your answer to 2 decimal places. (e.g., 32.16)) WACC

Answer 1

WACC = Weight of debt * Pretax cost of debt * (1 - Tax) + Weight of Equity * Cost of Equity

Debt-Equity ratio = 0.50

Based on this, if equity = 1, debt = 0.50

Weight of debt = Debt/(Debt + Equity) = 0.50/(0.50 + 1) = 1/3

Weight of equity = Equity/(Debt + Equity) = 1/(0.50 + 1) = 2/3

WACC = (1/3) * 6% * (1 - 34%) + (2/3) * 15%

WACC = 1.32% + 10%

WACC = 11.32%