In: Finance
Problem 12-10 Taxes and WACC [LO 3]
Benjamin Manufacturing has a target debt-equity ratio of .45. Its cost of equity is 12 percent, and its cost of debt is 7 percent. |
Required: |
If the tax rate is 35 percent, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
WACC |
% |
Hints
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Hint #1
WACC | 9.69% | |||||||||||
Working: | ||||||||||||
a. | After tax cost of debt | = | Before tax cost of debt*(1-Tax Rate) | |||||||||
= | 7%*(1-0.35) | |||||||||||
= | 4.55% | |||||||||||
b. | Debt-Equity ratio | = | 0.45 | |||||||||
Debt | 0.45 | |||||||||||
Equity | 1.00 | |||||||||||
Total | 1.45 | |||||||||||
weight of: | ||||||||||||
Debt | 0.45 | / | 1.45 | = | 0.31 | |||||||
Equity | 1.00 | / | 1.45 | = | 0.69 | |||||||
b. | Calculation of WACC: | |||||||||||
Capital Component | Weight | Cost | Weighted Average cost | |||||||||
Debt | 0.31 | 4.55% | 1.41% | |||||||||
Equity | 0.69 | 12.00% | 8.28% | |||||||||
Total | 9.69% | |||||||||||