Question

Fama’s Llamas has a weighted average cost of capital of 9.2 percent. The company’s cost of equity is 12.8 percent, and its cost of debt is 7.4 percent. The tax rate is 22 percent. What is the company’s debt-equity ratio? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Answer 1

Answer:

D_w = 51.2236%

E_w =  48.7764%

Explanation:

From the WACC formula we can solve for the weight

as Ew + Liabilities weight = 1

we can express Ew as (1-Liabilities weight)

$WACC = K_e(\frac{E}{E+D}) + K_d(1-t)(\frac{D}{E+D})$

Ke 0.128

Kd 0.074

t 0.22

after tax debt:  0,05772

WACC 0.092

$0.092 = 0.128(1-D_w) + 0,05772(D_w)$

$0.092 = 0.128-0.128(D_w) + 0,05772(D_w)$

$0.128 - 0.092= (0.128-0.05772)(D_w)$

$0.036 = 0,07028(D_w)$

D_w = 0,512236

E_w = 1 - 0.51236 =0.487764