Given,
Cost of equity = 13.9% or 0.139
Cost of debt = 7.1% or 0.071
Return on assets = 12% or 0.12
Solution :-
Let weight of equity be 'w'
weight of debt be '1-w'
Now,
return on assets = (cost of equity)(weight of equity) + (cost of debt)(weight of debt)
0.12 = (0.139)(w) + (0.071)(1 - w)
0.12 = (0.139)(w) + 0.071 - (0.071)(w)
0.12 - 0.071 = (0.139)(w) - (0.071)(w)
0.049 = (0.068)(w)
0.049/0.068 = w
0.720588235 = w
weight of debt = 1 - 0.720588235 = 0.279411765
Debt-equity ratio = weight of debt/weight of equity
= 0.279411765/0.720588235 = 0.39
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