ABC Corporation is a leveraged company. The cost of equity capital for ABC is 10%, its corporate income tax rate is 30%,, and the firm's before tax-cost of borrowing is 5%.
-Calculate the debt-to-total-market-value ratio that would result in ABC having a weighted average cost of capital of 7.5%. (Do not round intermediate calculations and round your final answer to nearest whole percent)

Question

Quizplus · Accepted Answer

Let D = debt-to-total-market-value ratio0.075 = (1 - D) × 0.10 + D × (1 - 0.30) × 0.050.075 = 0.10 - 0.10D + D × 0.70 × 0.05(0.1 _- 0.035)D = 0.1 - 0.0750.065D = 0.025D = 0.3846

ABC Corporation Is a Leveraged Company