A firm has a WACC of 11.5%, cost of equity is 16%, cost of debt is 8.5%, tax rat

Question

A firm has a WACC of 11.5%, cost of equity is 16%, cost of debt is 8.5%, tax rate is 35%. Find debt to equity ratio. 2) 3) A firm is using mixture of debt and equity while formulating its capital structure. For debt, it has 4000 outstanding bonds with par value of $1000 each, and selling for 103% of par. For common stock, the firm has 90,000 outstanding shares with selling price of $57 per share. Additional info: cost of debt 6.72%, beta coefficient 1.10, market risk premium 8%, risk free rate 6%, tax rate 35%. Required: by using market value weights, calculate the firms WACC

Explanation / Answer

2)

WACC = Wd×Rd×(1-t)+We×Ke

W is weights of respective portfolios

R is return on respective portfolios

Wd+We+Wp = 1

11.5% = Wd×8.5%×(1-35%)+(1-Wd)×16%

11.5% = Wd×5.525%+16%-16%×Wd

10.475%×Wd = 4.5%

Weight of debt, Wd = 0.4296 or 42.96%

Weight of equity, We = 0.5704 or 57.04%

Debt to equity ratio:

= 42.96%/57.04%

= 0.83

Hence, debt equity ratio is 0.83

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