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

The target debt-equity ratio is 51%. This can be calculated using the following formula:Target debt-equity ratio = (Cost of equity - Cost of debt) / (Cost of equity * Tax rate)= (12% - 8%) / (12% * 35%)= 4% / 42%= 51%

Spartan Ltd Has an Unlevered Cost of Capital of 11