Fama's Llamas has a weighted average cost of capital of 10.5 percent. The company's cost of equity is 15.5 percent, and its pretax cost of debt is 8.5 percent. The tax rate is 34 percent. What is the company's target debt-equity ratio?

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Quizplus · Accepted Answer

WACC = 0.105 = 0.155(E/V) + (0.085) (D/V) (1 - 0.34)0.105(V/E) = 0.155 + 0.085(0.66) (D/E)0.105(1 + D/E) = 0.155 + 0.0561(D/E)D/E = 1.02

Fama's Llamas Has a Weighted Average Cost of Capital of 10.5