Caddie Manufacturing has a target debt-equity ratio of 0.51 Its cost of equity is 10.96%, and its pretax cost of debt is 7.65%. If the tax rate is 27%, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16)


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

\[
\text{WACC} = \left( \frac{E}{V} \right) \cdot r_E + \left( \frac{D}{V} \right) \cdot r_D \cdot (1 - T_c)
\]

Where:
- \( E \) is the market value of equity
- \( D \) is the market value of debt
- \( V \) is the total value of the firm ( \( V = E + D \) )
- \( r_E \) is the cost of equity
- \( r_D \) is the pretax cost of debt
- \( T_c \) is the corporate tax rate

### Step 1: Determine the proportion of equity and debt
The debt-equity ratio is given as 0.51, meaning:

\[
\frac{D}{E} = 0.51
\]

Using this, we can express the proportions of debt and equity in terms of total value \( V \):

\[
D = 0.51E
\]
\[
V = E + D = E + 0.51E = 1.51E
\]

Thus, the proportion of equity and debt are:

\[
\frac{E}{V} = \frac{E}{1.51E} = \frac{1}{1.51} \approx 0.6623
\]
\[
\frac{D}{V} = \frac{D}{1.51E} = \frac{0.51E}{1.51E} = \frac{0.51}{1.51} \approx 0.3377
\]

### Step 2: Apply the WACC formula
Now, plug in the values:

- \( r_E = 10.96\% \)
- \( r_D = 7.65\% \)
- \( T_c = 27\% \)
- \( \frac{E}{V} = 0.6623 \)
- \( \frac{D}{V} = 0.3377 \)

\[
\text{WACC} = \left( 0.6623 \times 10.96\% \right) + \left( 0.3377 \times 7.65\% \times (1 - 0.27) \right)
\]

### Step 3: Calculate each component

- For the equity part:  
  \( 0.6623 \times 10.96\% \approx 7.265 \%\)

- For the debt part:  
  \( 0.3377 \times 7.65\% \times (1 - 0.27) \approx 1.880 \%\)

### Step 4: Add the components

\[
\text{WACC} \approx 7.265\% + 1.880\% = 9.145\%
\]

### Final Answer:
The company's **WACC is 9.15%**.

---

Would you like further details or clarifications?

Here are five related questions to consider:
1. How does the debt-equity ratio influence WACC?
2. What happens to WACC if the tax rate increases?
3. How is WACC affected if the company increases its leverage (i.e., more debt)?
4. What is the difference between WACC and cost of equity?
5. How does a company's risk profile affect its WACC?

**Tip:** A lower WACC indicates that a company can finance projects more cheaply, making investment opportunities more attractive.

Caddie Manufacturing has a target debt-equity ratio of 0.51. Its cost of equity is 10.96%, and its pretax cost of debt is 7.65%. If the tax rate is 27%, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16)

Learn how to calculate the Weighted Average Cost of Capital (WACC) for Caddie Manufacturing using a debt-equity ratio of 0.51, a cost of equity of 10.96%, a pretax cost of debt of 7.65%, and a tax rate of 27%. This step-by-step guide explains the key concepts of corporate finance and provides detailed calculations. Suitable for undergraduate finance or business students.

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