Question

Sixx AM Manufacturing has a target debt-equity ratio of 0.52. Its cost of equity is 12 percent, and its cost of debt is 7 percent. If the tax rate is 36 percent, what is the company's WACC?

Answer 1

If debt to equity ratio = 0.52
which means, debt = 0.52 and equity = 1
Total Debt + equity = 0.52 + 1 = 1.52
Debt weight = .52 / 1.52 = .342
Equity weight = 1/1.52 = .658
WACC = Wd*kd + We*ke
We = weight of equity
Wd = weight of debt
Kd = cost of debt
Cost of debt = interest (1- t)
Kd= 7 (1 - 0.36)
Kd= 4.48
Ke =12
WACC = Wd*kd + We*ke
WACC = .342 *4.48 + .658 *12
WACC = 9.43%

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