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Lannister Manufacturing has a target debt-equity ratio of
Lannister Manufacturing has a target debt-equity ratio of .55. Its cost of equity is 10 percent, and its cost of debt is 6 percent. If the tax rate is 21 percent, what is the company's WACC? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.) WACC
Expert Solution
| WACC is 8.13% | |||
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| Statement showing Computations | |||
| Particulars | Amount | ||
| Debt Equity Ratio = 0.55 | |||
| Debt / Equity =.55 | |||
| Debt = .55 Equity | |||
| Debt + Equity = 1 | |||
| .55 Equity + Equity = 1 | |||
| Equity =1/1.55 | 0.6452 | ||
| Debt = 1-.6452 | 0.3548 | ||
| Statement showing computation | |||
| Particulars | Weight | Cost | WACC |
| Cost of equity | 0.6452 | 10.00% | 6.45% |
| Cost of debt | 0.3548 | 4.74% | 1.68% |
| 1.00 | 8.13% | ||
| Pretax cost of debt | 6% | ||
| Tax Rate | 21% | ||
| kd = 6%(1-21%) | 4.74% | ||
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