Phil\'s Carvings, Inc. wants to have a weighted average cost of capital of 9.3 p
ID: 2621437 • Letter: P
Question
Phil's Carvings, Inc. wants to have a weighted average cost of capital of 9.3 percent. The firm has an aftertax cost of debt of 5.5 percent and a cost of equity of 11.0 percent. What debt-equity ratio is needed for the firm to achieve their targeted weighted average cost of capital?
Phil's Carvings, Inc. wants to have a weighted average cost of capital of 9.3 percent. The firm has an aftertax cost of debt of 5.5 percent and a cost of equity of 11.0 percent. What debt-equity ratio is needed for the firm to achieve their targeted weighted average cost of capital?
Explanation / Answer
Let x be debt
0.055x+.11(1-x)=0.093
0.055x-0.11x+.11=0.093
x=.31
1-x=0.69
ratio=.31/.69=0.45
ANs: 0.45