Problem 12-10 Taxes and WACC [LO 3] Benjamin Manufacturing has a target debt-equ
ID: 1174906 • Letter: P
Question
Problem 12-10 Taxes and WACC [LO 3]
Benjamin Manufacturing has a target debt-equity ratio of .45. Its cost of equity is 12 percent, and its cost of debt is 7 percent.
Required:
If the tax rate is 35 percent, what is the company’s WACC? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
WACC
%
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Hint #1
Benjamin Manufacturing has a target debt-equity ratio of .45. Its cost of equity is 12 percent, and its cost of debt is 7 percent.
Explanation / Answer
WACC 9.69% Working: a. After tax cost of debt = Before tax cost of debt*(1-Tax Rate) = 7%*(1-0.35) = 4.55% b. Debt-Equity ratio = 0.45 Debt 0.45 Equity 1.00 Total 1.45 weight of: Debt 0.45 / 1.45 = 0.31 Equity 1.00 / 1.45 = 0.69 b. Calculation of WACC: Capital Component Weight Cost Weighted Average cost Debt 0.31 4.55% 1.41% Equity 0.69 12.00% 8.28% Total 9.69%