Fama's Llamas has a weighted average cost of capital of 9.6 percent. The company's cost of...

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Famas Llamas has a weighted average cost of capital of 9.6 percent. The companys cost of equity is 11 percent, and its pret

business finance

Answer 1

Answer #1

After-tax cost of debt=6.9*(1-tax rate)

=6.9*(1-0.24)=5.244%

Let debt be $x

Equity be $y

Total=$(x+y)

WACC=Respective costs*Respective weight

9.6=(5.244x/(x+y)+(11y/(x+y)

9.6*(x+y)=5.244x+11y

9.6x+9.6y=5.244x+11y

x=(11-9.6)y/(9.6-5.244)

=0.3214 y(Approx)

Hence debt-equity ratio=debt/equity

=0.3214(Approx).

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Answer 2

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