Fama\'s Llamas has a weighted average cost of capital of 12 percent. The company

Question

Fama's Llamas has a weighted average cost of capital of 12 percent. The company's cost of equity is 17 percent, and its pretax cost of debt is 7.5 percent. The tax rate is 33 percent. What is the company's target debt-equity ratio? (Do not round your intermediate calculations.)

rev: 09_20_2012

1.1111

0.7168

0.681

0.7527

0.7455

Fama's Llamas has a weighted average cost of capital of 12 percent. The company's cost of equity is 17 percent, and its pretax cost of debt is 7.5 percent. The tax rate is 33 percent. What is the company's target debt-equity ratio? (Do not round your intermediate calculations.)

Explanation / Answer

WACC = Ke*E/V + KD(1-t)*D/V

12 = 17*E/V + 7.5*(1-0.33)*D/V

12 = 17*E/V + 5.025*D/V

12(E+D) = 17*E + 5.025D

12E + 12D = 17E + 5.025D

6.975D = 5E

D/E = 5/6.975

D/E = 0.7168

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