Famas Llamas has a weighted average cost of capital of 93 pe

Fama’s Llamas has a weighted average cost of capital of 9.3 percent. The company’s cost of equity is 13 percent, and its pretax cost of debt is 7.3 percent. The tax rate is 40 percent. What is the company’s target debt?equity ratio

Fama’s Llamas has a weighted average cost of capital of 9.3 percent. The company’s cost of equity is 13 percent, and its pretax cost of debt is 7.3 percent. The tax rate is 40 percent. What is the company’s target debt?equity ratio

Solution

Dear Student Thank you for using Chegg Please find below the answer Statementshowing Computations Paticulars Amount Cost of equity 13% Cost of debt = 7.3%*.60 4.38% Let Weight of debt be x so weight of equity 1-x WACC = Wd *Kd + We*Ke 9.3% = x*4.38%+ (1-x)*13% .093 = .0438x + .13 - .13x .037 = .0862x x = 42.92% Weight of debt   42.92% Weight of equity = 100% - 42.92% 57.08% Debt Equity Ratio = 42.92%/57.08%                            0.75