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TheOutlet Mall has a cost of equity of 12.9 percent, a pretax cost ofdebt...

The Outlet Mall has a cost of equity of 12.9 percent, a pretax cost of debt of 6.5 percent, and a return on assets of 11.3 percent. Ignore taxes. What is the debt-equity ratio?

  • 0.42

  • 0.33

  • 3.00

  • 2.54

  • 0.39


Solutions

Expert Solution

weight of equity = w

weight of debt = 1 - w

weight of equity * Cost of equity + weight of debt * Cost of debt = return on assets

w * 12.90% + (1 - w) * 6.50% = 11.30%

w * 12.90% + 6.50% - w * 6.50% = 11.30%

6.40% * w = 4.80%

w =weight of equity = 75%

1 - w = weight of debt = 25%

Thus DE ratio = weight of debt / weight of equity = 0.25 / 0.75 = 0.33 Option B

jeff jeffy answered 2 years ago
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