Answer:
target debt-equity ratio = 63.11 %
Explanation:
given data
cost of capital Keu = 12.8 percent
tax rate T = 23 percent
pretax cost of debt Kd = 7.35 percent
cost of equity Ke = 15.07 percent
solution
we get here target debt-equity ratio that is express by levered cost of equity
levered cost of equity = cost of capital + ( cost of capital - pretax cost of debt ) × [tex]\frac{Debit}{Equity}[/tex] × (1 - tax rate ) ..............................1
put here value and we get
15.07 % = 12.8 % + (12.8 % - 7.35 %) × [tex]\frac{Debit}{Equity}[/tex] × (1 - 34 %)
15.07 % = 12.8% + 0.03597 × [tex]\frac{Debit}{Equity}[/tex]
[tex]\frac{Debit}{Equity}[/tex] = (15.07% - 12.8%) ÷ 0.03597
[tex]\frac{Debit}{Equity}[/tex] = 0.6311
target debt-equity ratio = 63.11 %
