Your boss, whose background is in financial planning, is concerned about the company’s high weighted average...
Your boss, whose background is in financial planning, is concerned about the company’s high weighted average cost of capital (WACC) of 29%. He has asked you to determine what combination of debt-equity financing would lower the company’s WACC to 18%. If the cost of the company’s equity capital is 6% and the cost of debt financing is 27%, what debt-equity mix would you recommend?
the debt-equity mix should be_____ % debt and____ % equity financing.
Homework Answers
WACC = 18%
Let Weight of debt be X. Then weight of equity is (1-X)
Cost of equity, ke =6%
Cost of debt, kd = 27%
18% = 27% * X + 6%*(1-X)
18%= 27%X + 6% - 6% X
12% = 21% X
X = 12%/21% = 57.14% (weight of debt)
Weight of equity = 1- 57.14% = 42.85%
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