lima corp has a wacc of 10%. The company cost of equity is 13% and its...

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Question

lima corp has a wacc of 10%. The company cost of equity is 13% and its cost of debt is 7%. If tax rate is 35%, what is firms debt equity ratio?

business accounting

Answer 1

Answer #1

The weighted average cost of capital is calculated using the following equation

WACC = W_d r_d (1 - t_c ) + W_e r_e + W_p r_p

Weight of equity can be be written as (1 - W_d ) since W_e + W_d = 1

WACC = W_d r_d (1 - t_c ) + ( 1 - W_d ) r_e

0.10 = W_d 0.07 ( 1 - 0.35) + (1 - W_d ) 0.13

0.10 = 0.0455 W_d + ( 1 - W_d ) 0.13

0.10 = 0.0455 W_d + 0.13 - 0.13 W_d

-0.03 = -0.0845 W_d

W_d = 35.50%

Weight of debt = 35.50%

Weight of equity = 1 - 0.3550 = 0.6450

Weight of equity = 64.50%

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Answer 2

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