Question

Fama's Llamas has a WACC of 8.95 percent. The company's cost of equity is 10.4 percent, and its pretax cost of debt is 5.3 percent. The tax rate is 21 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.) Debt-equity ratio

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

В C 1 Cost of equity Pretax Cost of Debt 10.40% 5.30% Tax rate 4 21% Post-tax Cost of Debt 4.19% 6 WACC 8.95% 7 8 Weight of Equity Weight of Debt 9 0.7666 10 0.2334 11 Debt-Equity ratio 0.3044 12 13 14 N LnLO

Cell reference -

A В С 1 Cost of equity 0.104 2 0.053 Pretax Cost of Debt 0.21 Tax rate 4 |-с3"(1-С4) Post-tax Cost of Debt 6 WACC 7 0.0895 8 Weight of Equity Weight of Debt (C7-C5)/(C2-C5) -1-C9 9 10 11 =C10/C9 Debt-Equity ratio 12 13 14 LC

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.