Assume that XYZ Corporation is a leveraged company with the following information: K_l = cost of equity capital for XYZ = 13 percent
I = before-tax borrowing cost = 8 percent
T = marginal corporate income tax rate = 30 percent
Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of capital of 9.3 percent.

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) can be calculated using the formula: WACC = E/V * Re + D/V * Rd * (1-T), where E is the market value of the equity, D is the market value of the debt, V is the total market value (E + D), Re is the cost of equity, Rd is the cost of debt, and T is the tax rate. Rearranging the formula to solve for the debt-to-total-market-value ratio (D/V), we get D/V = (Re - WACC) / (WACC - Rd * (1-T)). Plugging in the given values: (0.13 - 0.093) / (0.093 - 0.08 * (1-0.3)) = 0.5 or 50%.

Assume That XYZ Corporation Is a Leveraged Company with the Following