Answer:
0.7684
Explanation:
The computation of debt-equity ratio is shown below:-
Let the amount of equity issued = x
Amount of debt = Project cost + Flotation cost - Amount of equity issued
$13,500,000 + $675,000 - x
Net amount received from equity = Amount of equity issued × (1 - Equity issued percentage)
= x × (1 - 0.065)
= Flotation cost of equity = Amount of equity issued × Equity issued percentage)
= x × 0.065
Net amount received from debt = (Project cost + Flotation cost - Amount of equity issued) × (1 - Debt issued percentage)
= ($13,500,000 + $675,000 - x) × (1 - 0.025)
Conditionally
x × 0.065 + ($13,500,000 + $675,000 - x) × 0.025 = $675,000
0.04 × x + $354,375 = $675,000
0.04 × x = $320,625
x = $8,015,625
Debt = $13,500,000 + $675,000 - $8,015,625
= $6,159,375
Target debt-equity ratio = Debt ÷ Equity
= $6,159,375 ÷ $8,015,625
= 0.7684
