Weighted average cost of capital (WACC)= (kd*w1)+(Ke*w2)
Where
kd = cost of Debt
ke = cost of equity
W1 = weight of debt = 6.4%*(1-0.35) = 4.16%
W2 = weight of stock
W1+W2 = 1
1-W1 = W2......(1)
WACC = (kd*w1)+(Ke*w2)
12.6 = (4.16*w1)+ (16.8*w2)
12.6 = 4.16w1+ 16.8*(1-W1)....... according to (1)
12.6 = 4.16w1+ 16.8- 16.8w1
12.64 w1 = 4.8
W1 = 0.38
W2 = . 62
Debt equity ratio = DEBT/ EQUITY
= 0.62/0.38
= 1.62
The option A) 1.61 is a correct answer
I hope my efforts will be fruitful to you ..?
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