Fama’s Llamas has a weighted average cost of capital of 9.2 percent. The company
ID: 2750223 • Letter: F
Question
Fama’s Llamas has a weighted average cost of capital of 9.2 percent. The company’s cost of equity is 12 percent, and its pretax cost of debt is 7.2 percent. The tax rate is 40 percent. What is the company’s target debtequity ratio? (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))
Fama’s Llamas has a weighted average cost of capital of 9.2 percent. The company’s cost of equity is 12 percent, and its pretax cost of debt is 7.2 percent. The tax rate is 40 percent. What is the company’s target debtequity ratio? (Do not round intermediate calculations and round your final answer to 4 decimal places. (e.g., 32.1616))
Explanation / Answer
Weighted average cost of capital = 9.2 percent
Cost of equity = 12 percent
Pretax cost of debt = 7.2 percent
Post tax cost of debt = 7.2*0.6= 4.32 percent
Debtequity ratio = Post tax cost of debt / Cost of equity
=4.32 / 12
= 0.36 or 36%
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