Sixx AM Manufacturing has a target debt—equity ratio of 0.53. Its cost of equity is 19 percent, and its cost of debt is 11 percent. If the tax rate is 32 percent, what is the company's WACC?

The WACC of the company is 15.01%

Explanation:

The WACC or weighted average cost of capital is the cost to firm of its capital structure. The capital structure of a firm can have 3 components namely debt, preferred stock and common stock. We take the weighted average of these components and their respective costs to calculate WACC. Moreover, we take the after tax cost of debt.

The WACC for a firm having only debt and common equity will be,

WACC = wD * rD * (1-tax rate)  +  wE * rE

First we need to determine the weightage of each component.

A debt equity ratio of 0.53  means that for every $0.53 of debt there is $1 of equity.

Total assets = debt + equity

Total assets = 0.53 + 1  =  1.53

Weighatge of debt = 0.53 / 1.53

Weightage of equity = 1 /1.53

WACC = 0.53 / 1.53  *  0.11  *  (1-0.32)  +  1 / 1.53  *  0.19

WACC =0.15009 or 15.009% rounded off to 15.01%

WACC is 14.97%

Explanation:

WACC=Ke*E/V+Kd*D/V*(1-t)

Ke is the cost of equity which is 19% 0r 0.19

Kd is the cost of debt which is 11% or 0.11

t is the tax rate applicable which is 32% or 0.32

D/V=D/E+D where D is the debt while E is teh equity

D/E=0.53 means that D is 0.53 and E is 1

D/V=0.53/(1+0.53)=0.53/1.53=0.35

E/V=1/(0.53+1)=1/1.53=0.65

WACC=0.19*0.65+0.11*0.35*(1-0.32)

WACC=(0.19*0.65)+(0.11*0.35*0.68)

WACC=0.1235 +0.02618

WACC=14.97%

Hence the weighted average cost of capital for Sixx AM Manufacturing is 14.97%

WACC=14.97%

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