Highfield Stockyard has a target debt to equity ratio of 0.70. The company's cost of equity is 14%, and its cost of debt is 7 percent. If the tax rate is 38% , what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Question

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DeniceSandidge DeniceSandidge · Answer 1 · 2019-12-14T15:33:54+01:00

Answer:

WACC = 10.01 %

Explanation:

given data

debt to equity ratio = 0.70

cost of equity = 14%

cost of debt = 7 %

tax rate = 38%

to find out

WACC

solution

we know debt to equity ratio = 0.70

so here debit = 0.70 × equity

and now we get weight for debt and equity

weight for equity is

debt + equity = 1

0.70 × equity + equity = 1

1.70 equity = 1

equity = [tex]\frac{1}{1.70}[/tex] = 0.58823

and

weight for debt is

debt + equity = 1

debt + 0.58823 = 1

debt = 1 - 0.58823

debt = 0.41176

so now

weight average cost of capital ( WACC ) will be here as

WACC = [ weight of debt × cost of debt × ( 1 - tax rate ) ] + ( weight of equity × cost of equity )

put here value we get

WACC = [ 0.41176 × 7% × ( 1 - 38% ) ] + ( 0.58823 × 14% )

WACC = 0.10022

WACC = 10.01 %