Phil's Carvings, Inc. wants to have a weighted average cost of capital of 9.5 percent. The...

Phil's Carvings, Inc. wants to have a weighted average cost of capital of 9.5 percent. The firm has an aftertax cost of debt of 6.5 percent and a cost of equity of 12.75 percent. What debt-equity ratio is needed for the firm to achieve their targeted weighted average cost of capital?

a. .67

b. .84

c. .92

d. .76

e. 1.08

Solutions

Expert Solution

Let weight of Debt = x, then weight of Equity = 1-x.

So, Weighted average cost of capital,

WACC = (1-x)*12.75% + x*6.5% = 9.5%

By solving the above equation, we get x = 0.52

Hence, weight of Debt = 0.52 and weight of equity = 0.48

Debt equity ratio = weight of debt/weight of equity = 0.52/0.48 = 1.08

Option e is correct

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

The weighted average cost of capital is determined by _____ the weighted average cost of equity....

The weighted average cost of capital is determined by _____ the weighted average cost of equity. a. multiplying the weighted average aftertax cost of debt by b. adding the weighted average pretax cost of debt to c. adding the weighted average aftertax cost of debt to d. dividing the weighted average pretax cost of debt by e. dividing the weighted average aftertax cost of debt by

The weighted average cost of capital (WACC) is calculated as the weighted average of cost of...

The weighted average cost of capital (WACC) is calculated as the weighted average of cost of component capital, including debt, preferred stock and common equity. In general, debt is less expensive than equity because it is less risky to the investors. Some managers may intend to increase the usage of debt, therefore increase the weight on debt (Wd). Do you think by increasing the weight on debt (Wd) will reduce the WACC infinitely? What are the benefits and costs of...

Fama's Llamas has a weighted average cost of capital of 11.5 percent. The company's cost of...

Fama's Llamas has a weighted average cost of capital of 11.5 percent. The company's cost of equity is 16 percent, and its pretax cost of debt is 7.5 percent. The tax rate is 34 percent. What is the company's target debt-equity ratio? (Do not round your intermediate calculations.)

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

Fama’s Llamas has a weighted average cost of capital of 9.6 percent. The company’s cost of equity is 12 percent, and its pretax cost of debt is 7.6 percent. The tax rate is 35 percent. What is the company's debt–equity ratio? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Fama’s Llamas has a weighted average cost of capital of 9.3 percent. The company’s cost of...

Fama’s Llamas has a weighted average cost of capital of 9.3 percent. The company’s cost of equity is 12.9 percent, and its cost of debt is 7.5 percent. The tax rate is 23 percent. What is the company’s debt-equity ratio? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Fama's Llamas has a weighted average cost of capital of 11.5 percent. The company's cost of...

Fama's Llamas has a weighted average cost of capital of 11.5 percent. The company's cost of equity is 17 percent, and its pretax cost of debt is 8.5 percent. The tax rate is 35 percent. What is the company's target debt-equity ratio? A. 0.8745 B. 1.8333 C. 0.9573 D. 0.9665 E. 0.9205

Fama's Llamas has a weighted average cost of capital of 11 percent. The company's cost of...

Fama's Llamas has a weighted average cost of capital of 11 percent. The company's cost of equity is 16 percent, and its pretax cost of debt is 9 percent. The tax rate is 31 percent. What is the company's target debt-equity ratio? (Do not round your intermediate calculations.) multiple choices 1.096 0.9916 1.0856 1.0438 2.5

Question 1. Weighted average cost of capital (LO11-1) Sauer Milk Inc. wants to determine the minimum...

Question 1. Weighted average cost of capital (LO11-1) Sauer Milk Inc. wants to determine the minimum cost of capital point for the firm. Assume it is considering the following financial plans: Cost (aftertax) Weights Plan A Debt........................................ 4.0% 30% Preferred stock........................................ 8.0 15 Common equity........................................ 12.0 55 Plan B Debt........................................ 4.5% 40% Preferred stock........................................ 8.5 15 Common equity........................................ 13.0 45 Plan C Debt........................................ 5.0% 45% Preferred stock........................................ 18.7 15 Common equity........................................ 12.8 40 Plan D Debt........................................ 12.0% 50% Preferred stock...........................................

What is Weighted Average Cost of Capital?

1) Fama's Llamas has a weighted average cost of capital of 13 percent. The company's cost...

1) Fama's Llamas has a weighted average cost of capital of 13 percent. The company's cost of equity is 18 percent, and its pretax cost of debt is 7.5 percent. The tax rate is 31 percent. What is the company's target debt-equity ratio? 0.9091 0.6709 0.607 0.639 0.6645 2) Stock in Daenerys Industries has a beta of 1.14. The market risk premium is 8.5 percent, and T-bills are currently yielding 4.5 percent. The company's most recent dividend was $1.7 per...

Subjects