[kan34]

This is the question I was given:

Taxes and WACC

Cookie Dough Manufacturing has a target debt−equity ratio of 0.54. Its cost of equity is 15 percent, and its cost of debt is 11 percent. If the tax rate is 34 percent, the company's WACC is percent.

This is how I have been trying to calculate it like this but keep getting it wrong.

WACC=(E/V) x Re + (D/V) x Rd x (1-Tc)
=2/3 x 15% + 1.3 x 11% x (1-34%)
=12.42%

But this is wrong. What am I doing wrong??

[ArcSine]

kan34, you're certainly on the right track. You just need to tweak your Debt-to-Capital and Equity-to-Capital weights (, and , respectively).

Remember that V is the total of Debt and Equity. You're given that Debt is 54% of Equity. In other words, the Debt / Equity ratio is 54 : 100.

That means the ratio of Debt to total Capital () is 54 : 154 -- not quite the 1/3 you're using.

So fine-tune your D/V and E/V accordingly; the rest of your calcs look good. Check back in and let us know what you got.

[kan34]

I got it to work that time. Thank you for your help.