Question

XXY Corp.’s has a target debt-to-equity ratio of 0.30, an equity beta of 1.10, has a marginal tax rate of 21%, and its debtholders require a return of 6%. Assuming that the current risk-free rate of interest is 2% and the expected return on the market portfolio is 12%, What is XXY Corp’s WACC? Enter your answer as a percent; do not include the % sign. Round your final answer to two decimals.

Answer 1

XXY Corp’s WACC is 11.09%

Capital		Weight	Cost
		a	b	c=a*b
Debt		0.230769	4.74%	1.09%
Equity		0.769231	13.00%	10.00%
WACC				11.09%
Working:
# 1 Calculation of weight of debt and equity
Debt-Equity ratio		=	0.30
Debt			0.30
Equity			1.00
Total			1.30
So, weight of:
Debt			0.30	/	1.30	=	0.230769
Equity			1.00	/	1.30	=	0.769231
Total							1.00000
# 2 Calculation of cost of debt and equity
After tax cost of debt	=	Before tax cost of debt*(1- Tax rate)
	=	6%*(1-0.21)
	=	4.74%
Cost of Equity	=	Risk free rate + Beta *(Market return - Risk free rate)
	=	2%+1.10*(12%-2%)
	=	13.00%