Respuesta :
Answer:
0.3044
Explanation:
Data provided in the question:
WACC = 8.95%
Company’s cost of equity = 10.4%
Pretax cost of debt = 5.3%
Tax rate = 21% = 0.21
Now,
After-tax rate of debt = Pretax cost of debt × (1 - tax rate)
= 5.3% × (1 - 0.21 )
= 4.187%
Let debt be x and Equity be y
Thus,
Total = $( x + y )
also,
WACC = ∑ ( costs × weight )
or
8.95 = ([tex](\frac{x}{(x+y)}\times4.187) + (\frac{ y}{(x+y)}\times10.4)[/tex]
8.95 (x+y) = 4.187x + 10.4y
or
8.95x + 8.95y = 4.187x + 10.4y
or
x = (10.4 - 8.95)y ÷ (8.95 - 4.187)
=0.3044y
or
[tex]\frac{x}{y}[/tex]
Therefore,
Debt-equity ratio = ( debt ) ÷ ( equity )
= x ÷ y
= 0.3044
Answer:
1.54
Explanation:
Fama's Llamas has a weighted average cost of capital of 9.5 percent. The company's cost of equity is 15.5 percent, and its pretax cost of debt is 8.5 percent. The tax rate is 34 percent. What is the company's target debt-equity ratio?
A. 0.89
B. 0.92
C. 0.98
D. 1.01
E.1.54
WACC = 0.095 = 0.155(E/V) + (0.085)(D/V) (1 - 0.34)0.095(V/E) = 0.155 + 0.085(0.66) (D/E)0.095(1 + D/E) = 0.155 + 0.0561(D/E)D/E = 1.54AACSB: AnalyticBlooms: AnalyzeDifficulty: 1 EasyEOC: 14-11Learning Objective: 14-03 How to determine a firm's overall cost of capital.Section: 14.4Topic: Target capital structure94.Jungle, Inc. has a target debt-equity ratio
