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Sixx AM Manufacturing has a target debt—equity ratio of 0.52. Its cost of equity is 16...

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Finance

Sixx AM Manufacturing has a target debt—equity ratio of 0.52.Its cost of equity is 16 percent, and its cost of debt is 11percent. If the tax rate is 34 percent, what is the company'sWACC?

Answer & Explanation Solved by verified expert
3.9 Ratings (394 Votes)

Weight Cost Weighted Cost
Debt      0.3421 7.26% 2.48%
Equity      0.6579 16% 10.53%
Total 13.01%
So, WACC is 13.01%
Working:
After tax cost of debt = Before tax cost of debt*(1-Tax rate)
= 11%*(1-0.34)
= 7.26%
Debt 0.52
Equity           1.00
Total 1.52
So, weight of:
Debt 0.52 / 1.52 =      0.3421
Equity           1.00 / 1.52 =      0.6579
Total      1.0000

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Sixx AM Manufacturing has a target debt—equity ratio of 0.52.Its cost of equity is 16 percent, and its cost of debt is 11percent. If the tax rate is 34 percent, what is the company'sWACC?

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