Question

Lannister Manufacturing has a target debt-equity ratio of 0.69. Its cost of equity is 20 percent, and its cost of debt is 11 percent. If the tax rate is 31 percent, what is the company's WACC?

• 14.19%

• 12.66%

• 11.44%

• 15.68%

• 14.93%

Answer 1

The company's WACC is computed as shown below:

= cost of debt ( 1 - tax rate ) x 0.69 / 1.69 + cost of equity x 1 / 1.69

= 0.11 x ( 1 - 0.31 ) x 0.69 / 1.69 + 0.20 x 1 / 1.69

= 14.93% Approximately

So the correct answer is option of 14.93%

Feel free to ask in case of any query relating to this question