Question

'Modigliani Manufacturing has a target debt-equity ratio of .50. Its cost of equity is 18 percent and its cost of debt is 11 percent. If the tax rate is 35 percent, what is Modigliani's WACC

Answer 1

Answer:

the Weighted average cost of capital is 14.38%

Explanation:

The computation of the weighted average cost of capital is shown below:

Weight of equity is

= 1 ÷ (1 + Debt equity Ratio)

= 1 ÷ 1.5

And, Weight of Debt is

= 0.5 ÷ 1.5

Now

WACC = Weight of Equity × Cost of Equity + Weight of Debt × Cost of Debt × (1 - Tax rate)

= 1 ÷ 1.5 × 18% + 0.5 ÷ 1.5 × 11% × (1 - 35%)

= 14.38%

hence, the Weighted average cost of capital is 14.38%