Fama’s Llamas has a weighted average cost of capital of 8.9 percent. The company’s cost of...
Fama’s Llamas has a weighted average cost of capital of 8.9 percent. The company’s cost of equity is 13 percent, and its pretax cost of debt is 6.2 percent. The tax rate is 23 percent. What is the company’s target debt-equity ratio?
Please explain each step as I need to understand this conceptually.
Homework Answers
After-tax cost of debt=6.2*(1-tax rate)
=6.2*(1-0.23)=4.774%
Let debt be $x
Equity be $y
Total=$(x+y)
WACC=Respective cost*Respective weight
8.9=(x/(x+y)*4.774)+(y/(x+y)*13)
8.9*(x+y)=4.774x+13y
8.9x+8.9y=4.774x+13y
x=(13-8.9)y/(8.9-4.774)
=0.9937y
Hence debt-equity ratio=debt/equity
=0.9937(Approx).
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Fama's Llamas has a weighted average cost of capital of 10.5 percent. The company's cost of equity is 17 percent, an...
Fama's Llamas has a weighted average cost of capital of 10.5
percent. The company's cost of equity is 17 percent, and its pretax
cost of debt is 8 percent. The tax rate is 34 percent. What is the
company's target debt-equity ratio?
Check my work Fama's Llamas has a weighted average cost of capital of 10.5 percent. The company's cost of equity is 17 percent, and its pretax cost of debt is 8 percent. The tax rate is 34 percent....
Fama's Llamas has a weighted average cost of capital of 10.5
percent. The company's cost of equity is 17 percent, and its pretax
cost of debt is 8 percent. The tax rate is 34 percent. What is the
company's target debt-equity ratio?
Check my work Fama's Llamas has a weighted average cost of capital of 10.5 percent. The company's cost of equity is 17 percent, and its pretax cost of debt is 8 percent. The tax rate is 34 percent....
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