Using a financial calculator if possible. Caddie Manufacturing has a target debt-equity ratio of .55. Its cost of equit...

Question

Question

Caddie Manufacturing has a target debt-equity ratio of .55. Its cost of equity is 10 percent, and its pretax cost of debt is

Using a financial calculator if possible.

Answer 1

Answer #1

This question does not require a financial calculator and can even be done with a simple calculator if the concepts are well understood.

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

Debt-Equity Ratio = 0.55

This means, if Equity = 1, Debt = 0.55

Weight of debt = 0.55/(0.55 + 1) = 0.3548

Weight of equity = 1/(0.55 + 1) = 0.6452

WACC = 0.3548 * 6% * (1 - 21%) + 0.6452 * 10%

WACC = 8.13%

Answer 2

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