Respuesta :
Answer:
46:54
Explanation:
Given that,
Weighted average cost of capital = 9.8 percent
Cost of equity = 13 percent
Pretax cost of debt = 7.5 percent
Tax rate = 21 percent
The target debt-equity ratio refers to the ratio of debt to equity.
The formula for Weighted average cost of capital is as follows:
WACC = [weight of debt × Cost of Debt (1 - tax rate)] + (weight of equity × cost of equity)
Let the weight of debt be x, then the weight of equity is (1 - x),
0.098 = [x × 0.075 (1 - 0.21)] + ((1 - x) × 0.13)
0.098 = 0.06x + 0.13 - 0.13x
0.098 = 0.13 - 0.07x
0.07x = 0.13 - 0.098
0.07x = 0.032
Weight of debt: x = 0.46 or 46%
Weight of equity: (1 - x) = (1 - 0.46)
= 0.54 or 54%
Therefore, the company’s target debt-equity ratio is 46:54.
The company’s target debt-equity ratio will be 85.19%.
Given Information
Weighted average cost of capital = 9.8%
Cost of equity = 13%
Pretax cost of debt = 7.5%
Tax rate = 21%
Target debt-equity ratio = Ratio of debt to equity.
- The formula for the Weighted average cost of capital (WACC) is [weight of debt × Cost of Debt (1 - tax rate)] + (weight of equity × cost of equity)
- Let the weight of debt be x, so, the weight of equity will be (1 - x),
0.098 = [x * 0.075 (1 - 0.21)] + ((1 - x) * 0.13)
0.098 = 0.06x + 0.13 - 0.13x
0.098 = 0.13 - 0.07x
0.07x = 0.13 - 0.098
0.07x = 0.032
x = 0.032 / 0.07
x = 0.46
x = 46%
Hence, the weight of debt is 46%.
Weight of equity = (1 - x)
Weight of equity = (1 - 0.46)
Weight of equity = 0.54
Weight of equity = 54%
Debt equity ratio = Debt/Equity
Debt equity ratio = 0.46 / 0.54
Debt equity ratio = 0.85185185185
Debt equity ratio = 85.19%
Therefore, the company’s target debt-equity ratio will be 85.19%.
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