Question

Miller Manufacturing has a target debt-equity ratio of .45. Its cost of equity is 11.4 percent and its cost of debt is 6.1 percent. If the tax rate is 24 percent, what is the company’s WACC?

Answer 1

Step-by-step explanation:

In the solution provided by ewomazinoade, Cost of debt (6.1%) and cost of equity (11.4%) has been mistakenly swapped.

So, the correct answer would be 9.3%

Answer 2

Answer:6.89%

Step-by-step explanation:

If it's target debt to equity ratio is 0.45, the percentage of debt in its capital structure = D /D + E = 0.45 / (1 +0.45) = 0.31 = 31%

The percentage of equity in the capital structure = 100 - 31% = 69%

The Weighted Average Cost of Capital = [Weight of debt × cost of debt × (1 - tax rate)] [weight of equity × cost of equity]

=( 0.31 × 11.4% × 0.76) + (6.1% × 0.69)

= 2.69 + 4.21 = 6.89%