Answer:
0.2
Explanation:
The weighted average cost of capital (WACC) is calculated as below:
WACC = (D/A) x r_D x (1-t) + (E/A) x r_E , where:
A: Market value of company asset;
D: Market value of company debt;
E: Market value of company equity;
r_D: pre-tax cost of debt;
r_E: cost of equity;
t: tax rate
Rearrange above formula a bit, we get:
WACC = (D/A) x r_D x (1-t) + (1 - D/A) x r_E
Putting all the numbers together, we have:
10.9% = (D/A) x 8.9% x (1 - 38%) + (1 - D/A) x 12%
Solve the equation, we get D/A = 17% or D/E = 0.2
So, target debt−equity ratio is 0.2
