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

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 11 percent. If the tax rate is 34 percent, what is the company's WACC?

Expert Solution

		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

jeff jeffy answered 10 months ago

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