Famas Llamas has a weighted average cost of capital of 10.6 percent. The company
ID: 2635401 • Letter: F
Question
Famas Llamas has a weighted average cost of capital of 10.6 percent. The companys cost of equity is 14 percent, and its pretax cost of debt is 8.6 percent. The tax rate is 38 percent. What is the companys target debt?equity ratio? (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))
Famas Llamas has a weighted average cost of capital of 10.6 percent. The companys cost of equity is 14 percent, and its pretax cost of debt is 8.6 percent. The tax rate is 38 percent. What is the companys target debt?equity ratio? (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))
Explanation / Answer
WACC = 0.106 = 0.14*(E/V) + 0.086*(D/V) * (1-0.38)
0.106 * (V/E) = 0.14 + 0.086 * (0.62) (D/E)
0.106 (1 + D/E) = 0.14 + 0.086 * (0.62) (D/E)
0.106 + 0.106 * (D/E) = 0.14 + 0.086 * (0.62) (D/E)
0.106 + 0.106 * (D/E) = 0.14 + 0.05332 (D/E)
D/E = 0.6454
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