Answer: 1.6631
Explanation:
The company’s target debt-equity ratio will be calculated thus:
Let's assume x = equity
Let's assume (1-x) = debt
Total funds needed = $14,600,000 + $785,000 = $15,385,000
Then, we calculate the flotation which will be:
15,385,000 × (1 - f) = 14,600,000
15,385,000 - 15,385,000f = 14,600,000
-15,385,000f = 14,600,000 - 15385000
- 15,385,000f = -785,000
f = -785000 / -15385000
f = 0.05102
Then,
(7.6% × x) + (3.6% × 1-x) = 0.05102
(0.076 × x) + (0.036 × 1-x) = 0.05102
0.076x + 0.036 - 0.036x = 0.05102
0.076x - 0.036x = 0.05102 - 0.036
0.04x = 0.01502
x = 0.01502/0.04
x = 0.3755
Equity = 0.3755 = 3.755%
Debt = 1-x = 1 - 0.3755 = 0.6245
Debt equity ratio = Debt / Equity
= 0.6245/0.3755
= 1.6631
The debt-equity ratio is 1.6631.
