Sixx AM Manufacturing has a target debt—equity ratio of 0.68. Its cost of equity is 16 percent, and its cost of debt is 9 percent. If the tax rate is 34 percent, what is the company’s WACC?

Question

BlackTom AI · Accepted Answer

The problem asks us to compute the weighted average cost of capital (WACC) given a target debt–equity ratio, costs of equity and debt, and a tax rate.
First, restate the data: target D/E = 0.68, cost of equity r_e = 16% (0.16), cost of debt r_d = 9% (0.09), and tax rate T = 34% (0.34).
Next, determine the weights for debt and equity from the D/E ratio. If D/E = 0.68, we can express D = 0.68E. The total value V = D + E = 0.68E + E = 1.68E. Therefore, the weight of debt w_d = D/V = 0.68/1.68 ≈ 0.405, and the weight of equity w_e = E/V = 1/1.68 ≈ 0.595.
Now adjust the cost of debt for taxes to get the after‑tax cost of debt: r_d(1 − T) = 0.09 × (1 − 0.34) = 0.09 × 0.66 = 0.0594 (5.94%).
Compute WACC by combining the after-tax cost of debt and the cost of equity with their respective weights: WACC = w_e × r_e + w_d × r_d(1 − T).
Plugging the numbers: WACC ≈ 0.595 × 0.16 + 0.405 × 0.0594.
Calculate each term: 0.595 × 0.16 ≈ 0.0952 (9.52%), and 0.405 × 0.0594 ≈ 0.0241 (about 2.41%).
Sum them: 0.0952 + 0.0241 ≈ 0.1193, i.e., 11.93%.
Now review the answer choices to see which matches this result. 
- 9.16%: too low, would require a much smaller equity weight or tax effect.
- 11.93%: matches the calculated WACC using the given D/E ratio and tax rate.
- 12.52%: would occur if weights or rates were slightly different; not consistent with the precise numbers here.
- 10.01%: also too low given the substantial equity cost and debt cost after tax.
Thus, the option closest to the computed WACC is 11.93%, which aligns with the math above.

FA25-BL-BUS-F305-1130 Final Exam

Sixx AM Manufacturing has a target debt—equity ratio of 0.68. Its cost of equity is 16 percent, and its cost of debt is 9 percent. If the tax rate is 34 percent, what is the company’s WACC?

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