Miller Manufacturing has a target debtequity ratio of 50 Its

Miller Manufacturing has a target debt–equity ratio of .50. Its cost of equity is 15 percent, and its cost of debt is 6 percent. If the tax rate is 34 percent, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  WACC %  

Solution

Debt equity ration = 0.50; means equity is 1 then debt is 0.5

Therefore, Weight of debt = 0.5 / (1+0.5) = 0.5/1.15 and Weight of equity = 1/1.5

WACC = Cost of equity x weight of equity + Cost of debt x Weight of debt x (1-Tax)

WACC = 15% x 1/1.5 + 6% x 0.5/1.5 x (1-34%)

WACC = 11.32%