A firm has an expected return on equity of 15% and an after-tax cost of debt of 6%.What debt-equity ratio produces a WACC of 12%?
A) 0.50
B) 0.75
C) 0.67
D) 0.33

Name: A firm has an expected return on equity of 15% and an after-tax cost of debt of 6%.What debt-equity ratio produces a WACC of 12%? A) 0.50 B) 0.75 C) 0.67 D) 0.33
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Question

Quizplus · Accepted Answer

0.12 = (0.15)(1 − x) + 0.06x; x = 1 / 3 D/E = (1 / 3) / (1 − 1/3) = 1 / 2, or 0.50

A Firm Has an Expected Return on Equity of 15