Question

Caddie Manufacturing has a target debt-equity ratio of .35. Its cost of equity is 12 percent, and its pretax cost of debt is 6 percent. If the tax rate is 21 percent, what is the company’s WACC?

Answer 1

10.12%

Step-by-step explanation:

The computation of the WACC is shown below:

= Cost of debt × (1 - tax rate) × weight of debt + cost of equity × weight of equity

= 6% × (1 - 0.21) × 0.35 ÷ 1.35 + 12% × 1 ÷ 1.35

= 1.23% + 8.89%

= 10.12%

We simply multiplied the capital structure with each of its weight so that the WACC could come and the same is to be considered