Phil\'s Carvings, Inc. wants to have a weighted average cost of capital of 9.2 p
ID: 2698322 • Letter: P
Question
Phil's Carvings, Inc. wants to have a weighted average cost of capital of 9.2 percent. The firm has an aftertax cost of debt of 6.4 percent and a cost of equity of 12.8 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 9.2 percent. The firm has an aftertax cost of debt of 6.4 percent and a cost of equity of 12.8 percent. What debt-equity ratio is needed for the firm to achieve their targeted weighted average cost of capital?
Explanation / Answer
let the debt percent be x
6.4 * x + 12.8 * ( 1 - x ) = 9.2
-6.4x = -3.6
x = 9/16
1- x = 7/16
Hence the ratio is 9/7 = 1.29
Hence d) 1.29