Fama’s llamas has a wacc of 8.95 percent. the company’s cost of equity is 10.4 percent, and its pretax cost of debt is 5.3 percent. the tax rate is 21 percent. what is the company’s target debt-equity ratio?

0.3044

Explanation:

Data provided in the question:

WACC = 8.95%

Company’s cost of equity = 10.4%

Pretax cost of debt = 5.3%

Tax rate = 21% = 0.21

Now,

After-tax rate of debt = Pretax cost of debt × (1 - tax rate)

= 5.3% × (1 - 0.21 )

= 4.187%

Let debt be x and Equity be y

Thus,

Total = $( x + y )

also,

WACC = ∑ ( costs × weight  )

or

8.95 = (

8.95 (x+y) = 4.187x + 10.4y

or

8.95x + 8.95y = 4.187x + 10.4y

or

x = (10.4 - 8.95)y ÷ (8.95 - 4.187)

=0.3044y

or

Therefore,

Debt-equity ratio = ( debt ) ÷ ( equity  )

= x ÷ y

= 0.3044

answer; specific performance;