Lannister Manufacturing has a target debt-equity ratio of. 55. Its cost of equity is 11 percent, and its cost of debt is 6 percent. If the tax rate is 21 percent, what is the company's WACC?

8.8%

Explanation:

Given

cost of equity is 11 percent = 0.11

cost of debt is 6 percent = 0.06

tax rate 21 percent = 0.21

debt-equity ratio = 0.55

That is debt = 0.55 * equity

We will calculate the weight for debt and equity as

**Weight for equity

Debt + equity = 1

0.55 * equity + equity = 1

1.55 * equity = 1

equity = 1/1.55

equity = 0.6452

** * weight for debt

Debt + equity = 1

Debt + 0.6452 = 1

Debt = 1 - 0.6452

Debt = 0.3548

Now we calculate the weighted average cost of capital WACC

WACC = [weight of debt * (cost of debt * (1 - tax rate) ] + weight of equity * cost of equity

= [0.3548 * (0.06 * (1 - 0.21) ] + (0.6452 * 0.11)

= 0.01681752 + 0.070972

=0.08778952

WACC = 8.8%