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Lannister Manufacturing has a target debt-equity ratio of 0.55. Its cost of equity is 18 percent,...

Lannister Manufacturing has a target debt-equity ratio of 0.55. Its cost of equity is 18 percent, and its cost of debt is 12 percent. If the tax rate is 32 percent, what is the company's WACC?

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Answer #1

Given,

Debt equity ratio = 0.55

Cost of equity = 18%

Cost of debt = 12%

Tax rate = 32% or 0.32

Solution :-

Debt equity ratio of 0.55 means debt is 0.55 and equity is 1.

WACC = (cost of equity) [equity (debt + equity)] + (cost of debt) [debt (debt + equity)] (1 - tax rate)

= (18%) [1 (0.55 + 1)] + (12%) [0.55 (0.55 + 1)] (1 - 0.32)

= (18%) [1 1.55] + (12%) [0.55 1.55] (0.68)

= (18%) [0.64516129] + (12%) [0.35483871] (0.68)

= 11.6129% + 2.89548387% = 14.508%

Thus, the company's WACC is 14.508%

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