To calculate the WACC (Weighted Average Cost of Capital), we use the following formula:

$WACC = \left( \frac{E}{V} \times R_e \right) + \left( \frac{D}{V} \times R_d \times (1 - T) \right)$

Where:

• $R_e$ = Cost of equity (12.37%)
• $R_d$ = Cost of debt (6.02%)
• $E$ = Equity
• $D$ = Debt
• $V$ = Total value ( $V = E + D$ )
• $T$ = Tax rate (27% or 0.27)

Step 1: Determine the proportions of equity and debt

We are given the debt-equity ratio $\frac{D}{E} = 0.61$. This means for every $1 of equity, there is $0.61 of debt.

To find the proportion of debt $\frac{D}{V}$ and equity $\frac{E}{V}$, we can do the following:

$\frac{D}{E} = 0.61 \implies \frac{D}{V} = \frac{0.61}{1 + 0.61} = \frac{0.61}{1.61} \approx 0.3789$ $\frac{E}{V} = \frac{1}{1 + 0.61} = \frac{1}{1.61} \approx 0.6211$

Step 2: Apply the WACC formula

Now we can substitute all the values into the WACC formula:

$WACC = (0.6211 \times 12.37\%) + (0.3789 \times 6.02\% \times (1 - 0.27))$ $WACC = (0.6211 \times 0.1237) + (0.3789 \times 0.0602 \times 0.73)$ $WACC = 0.07684 + 0.01667$ $WACC = 0.09351 = 9.35\%$

So, Caddie Manufacturing's WACC is 9.35%.

Would you like further explanation on any of the steps? Let me know!

Related Questions:

1. How would the WACC change if the debt-equity ratio increased?
2. What happens to WACC if the tax rate increases?
3. Why does the cost of debt get adjusted by the tax rate in the WACC formula?
4. How would an increase in the cost of equity impact the WACC?
5. Can a company's WACC be higher than its cost of equity?

Tip:

A lower WACC typically implies cheaper financing for the company, which is favorable for investments.