Question

Carbon Manufacturing has a target debt—equity ratio of 0.3. Its cost of equity is 0.11, and its pretax cost of debt is 0.05. If the tax rate is 0.32, what is the company's WACC? Enter the answer with 4 decimals (0.0123)

Answer 1

Equity ratio = 0.30. It means weight of equity = 0.30

So, Weight of debt = 1 – Weight of equity

= 1 – 0.30

= 0.70

Cost of equity = 0.11

After tax Cost of debt = Cost of debt before tax x ( 1 – tax rate)

= 0.05 x ( 1 – 0.32)

= 0.05 x 0.68

= 0.034

So, Weight Average Cost of Capital

= Weight of equity x Cost of equity + Weight of debt x Cost of debt

= 0.30 x 0.11 + 0.70 x 0.034

= 0.033 + 0.0238

= 0.0568