Phil's Carvings, Inc. 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?
A) 0.33
B) 0.40
C) 0.50
D) 0.60
E) 0.67

Question

Quizplus · Accepted Answer

To achieve a WACC of 9% with a cost of debt of 5% and a cost of equity of 11%, the debt-equity ratio should be 0.50. This is calculated using the formula for WACC and solving for the weight of debt and equity.