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Problem 12-10 Taxes and WACC [LO 3] Benjamin Manufacturing has a target debt-equity ratio of .45....

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

%

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eBook & Resources

Hint #1

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Expert Solution

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%

jeff jeffy answered 3 years ago
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