Spartan Ltd has an unlevered cost of capital of 11%,a cost of debt of 8%, and a tax rate of 35%.What is the target debt-equity ratio if the targeted cost
Of equity is 12%?
A).44
B).49
C).51
D).56
E).62

Question

Quizplus · Accepted Answer

First, we need to calculate the weighted average cost of capital (WACC) using the unlevered cost of capital, cost of debt, and target debt-equity ratio:

WACC = (1 - D/E) * cost of equity + (D/E * cost of debt * (1 - tax rate))

Substituting the given values, we get:

0.12 = (1 - D/E) * 0.11 + (D/E * 0.08 * 0.65)

Solving for D/E, we get:

D/E = 0.51

Therefore, the target debt-equity ratio is 0.51 or 51%. The answer is C.

Spartan Ltd Has an Unlevered Cost of Capital of 11%,a