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Modigliani Manufacturing has a target debt-equity ratio of .50. Its cost of equity is 18 percent and its cost of debt is 11 percent. If the tax rate is 35 percent, what is Modigliani's WACC? 14.38% 16.31% 18.92% 20.55% 22.34%

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ahmedgodtrust

Answer: ko = ke(E/V) + kd(D/V)(1-T)

              ko = 18(100/150) + 11(50/150)(1-0.35)

              ko = 12 + 2.38

              ko = 14.38%

The correct answer is 14.38%

Explanation: WACC equals cost of equity multiplied by the ratio of equity to value of the firm plus cost of debt multiplied by the after-tax ratio of debt to the value of the firm. the variables are defined as follows:

Ko = WACC

ke = Cost of equity

E   = Market value of equity

kd = Cost of debt

D  = Market value of debt

T  = Corporate tax rate

The Modigliani's WACC is 14.38%.

  • The calculation is as follows:

Weight of equity = 1 ÷ (1+Debt equity Ratio) = 1 ÷ 1.5

Weight of Debt = 0.5 ÷ 1.5

WACC =Weight of Equity × Cost of Equity + Weight of Debt × Cost of Debt × (1-Tax rate)

=1 ÷ 1.5 × 18% + 0.5 ÷ 1.5 × 11% × (1 -35%)

= 14.38%

Therefore we can conclude that the first option is correct.

Learn more: brainly.com/question/6201432

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