Fama’s Llamas has a WACC of 10.3 percent. The company’s cost of equity is 13.2 p
ID: 2751128 • Letter: F
Question
Fama’s Llamas has a WACC of 10.3 percent. The company’s cost of equity is 13.2 percent, and its cost of debt is 8.9 percent. The tax rate is 40 percent.
What is Fama’s target debt-equity ratio? (Do not round intermediate calculations. Round your answer to 4 decimal places (e.g., 32.1616).)
Debt-equity ratio:
Fama’s Llamas has a WACC of 10.3 percent. The company’s cost of equity is 13.2 percent, and its cost of debt is 8.9 percent. The tax rate is 40 percent.
Required:What is Fama’s target debt-equity ratio? (Do not round intermediate calculations. Round your answer to 4 decimal places (e.g., 32.1616).)
Debt-equity ratio:
Explanation / Answer
WACC = Wd×Rd×(1-t)+We×Ke
W is weights of respective portfolios
R is return on respective portfolios
Wd+We = 1
0.103 = Wd×0.089×(1-0.40)+(1-Wd)×0.132
0.103 = Wd×0.0534+0.132-0.132×Wd
Wd = 0.3689
We = 0.6311
Debt equity ratio:
= 0.3689÷0.6311
= 0.5845