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Caddie Manufacturing has a target debt-equity ratio of .60. Its cost of equity is 11 percent, and its pretax cost of debt is 6 percent. If the tax rate is 22 percent, what is the company’s WACC? |
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After-tax cost of debt=6*(1-tax rate)
=6*(1-0.22)=4.68%
debt-equity ratio=debt/equity
Hence debt=0.6*equity
Let equity be $x
Debt=$0.6x
Total=$1.6x
WACC=Respective costs*Respective weight
=(x/1.6x*11)+(0.6x/1.6x*4.68)
=8.63%
Caddie Manufacturing has a target debt-equity ratio of .60. Its cost of equity is 11 percent,...