Phil's Carvings wants to have a weighted average cost of capital of 9%.The ﬁrm has an after-tax cost of debt of 5 %and a cost of equity of 11%.What debt-equity ratio is needed for the ﬁrm to
Achieve its targeted weighted average cost of capital?

Question

Quizplus · Accepted Answer

To achieve a WACC of 9%, use the formula: WACC = (E/V) * Re + (D/V) * Rd. Let E/V = equity proportion and D/V = debt proportion. Given Re = 11%, Rd = 5%, and WACC = 9%, solve for D/E. The correct D/E ratio is 0.50.

Phil's Carvings Wants to Have a Weighted Average Cost of Capital