Without any taxes, equity has a return of 24%, and debt has a return of 12%....
Without any taxes, equity has a return of 24%, and debt has a return of 12%. The overall WACC is 16%. What is the debt ratio (i.e., the proportion of debt financing)?
66.7%
75.0%
60.0%
or 54.0%
Homework Answers
WACC = Wd×Rd×(1-t)+We×Ke
W is weights of respective portfolios
R is return on respective portfolios
Wd+We = 1
16% = Wd×12%×(1-0%)+(1-Wd)×24%
16% = Wd×12%+24%-Wd×24%
Wd×12% = 8%
Hence, Debt ratio is 66.7%
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