Whole Fresh Supermarkets have a cost of equity of 10 percent and a pre-tax cost of debt of 5 percent. The return unlever...
Whole Fresh Supermarkets have a cost of equity of 10 percent and a pre-tax cost of debt of 5 percent. The return unlevered is 6.82 What is the firm’s DE?
A. 2.00
B. 1.50
C. 2.25
D. 1.00
E. 1.75
Homework Answers
let the amount of equity be x
return unlevered = cost of equity * x + cost of debt * (1 - x)
6.82 = 10 * x + 5 * (1 - x)
5x = 1.82
x = .364
amount of equity = .364
thus amount of debt = 1 - x
= .636
Which gives debt to equity ratio = .636/.364
= 1.75
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