Lannister Manufacturing has a target debtequity ratio of 60

Lannister Manufacturing has a target debtequity ratio of .60. Its cost of equity is 14 percent, and its cost of debt is 8 percent. If the tax rate is 38 percent, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Solution

Cost of equity                   = 14%

Cost of debt (after tax)     = 8% x (1-tax rate)

= 8% x (1-38%)

= 8% x 62% = 4.96%

                                          WACC

Source                   Weight     x     Cost     =          Weighted cost

Equity                   100                  14                    1400

Debt                      60                    4.96                 297.6

Total                      160                                          1697.6

WACC      = Total weighed cost / Total weights

                  = 1697.6 / 160 = 10.61%