x Dinklage Corp. Has 8 Million s x On -Line Assessment #9: Cost ezto.mheducation

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x Dinklage Corp. Has 8 Million s x On -Line Assessment #9: Cost ezto.mheducation.com/hm.tpx S Sana Safinaz Online @ Login-é, z score Calculator me l Shadow Hea.. Neehr Perfect Gol connect FINANCE sessment #9: Cost of Capital Question 3 (of 10) value: 100 points Problem 14-11 Finding the Target Capital Structure [LO3 Fama's Liamas has a weighted average cost of capital of 9.8 percent. The company's cost of equity is 12 percent, and its pretax cost of debt is 7.8 percent. The tax rate is 40 percent. What is the company's target debt-equity ratio? (Do not round intermediate calculations and round your final answer to 4 decimal places, e.g, 32.1616.) Debt-equity ratio Hints References eBook &Resources; Hinte! 5

Explanation / Answer

Let debt be $x

Equity be $y

Total=$(x+y)

After tax cost of debt=7.8(1-0.4)=4.68%

WACC=Respective costs*Respective weights

9.8=(x/(x+y)*4.68)+(y/(x+y)*12)

9.8(x+y)=4.68x+12y

9.8x+9.8y=4.68x+12y

Hence x=(12-9.8)y/(9.8-4.68)

=0.4297y

Hence debt-equity ratio=Debt/Equity

=0.4297(Approx)

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