Question

Fama’s Llamas has a weighted average cost of capital of 9.1 percent. The company’s cost of equity is 13 percent, and its pretax cost of debt is 6.1 percent. The tax rate is 24 percent. What is the company’s target debt-equity ratio? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Answer 1

WACC = Wd X Kd + We X Ke 9.1% = W1 x 4.64% +(1-W1)x13% W1 = 46.63% Capital structure of debt = Capital structure of eqity = 46.63% 53.37% Target debt - equity ratio = 0.8737 [ 46.63/53.37]