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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
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