5- Lannister Manufacturing has a target debtequity ratio of .55. Its cost of equ

Question

5-

Lannister Manufacturing has a target debtequity ratio of .55. Its cost of equity is 14 percent, and its cost of debt is 9 percent. If the tax rate is 40 percent, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Lannister Manufacturing has a target debtequity ratio of .55. Its cost of equity is 14 percent, and its cost of debt is 9 percent. If the tax rate is 40 percent, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Debt-equity ratio=Debt/Equity

Let debt=$x

Equity=$0.55x

Total=$1.55x

After tax cost of debt=9(1-0.4)=5.4%

WACC=Respective costs*Respective weights

=(0.55x/1.55x*5.4)+(x/1.55x*14)

=10.95%(Approx).

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