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Fama's Llamas has a weighted average cost of capital of 11.5 percent. The company's cost of...

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Finance

Fama's Llamas has a weighted average cost of capital of 11.5percent. The company's cost of equity is 17 percent, and its pretaxcost of debt is 8.5 percent. The tax rate is 35 percent. What isthe company's target debt-equity ratio?

A. 0.8745

B. 1.8333

C. 0.9573

D. 0.9665

E. 0.9205

Answer & Explanation Solved by verified expert
3.8 Ratings (337 Votes)
Solution Calculation of weight of debt and equity in WACC The formula for calculating the weighted average cost of capital is WACC Ke We Kd 1 t Wd Ke Cost of equity    See Answer
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Transcribed Image Text

Fama's Llamas has a weighted average cost of capital of 11.5percent. The company's cost of equity is 17 percent, and its pretaxcost of debt is 8.5 percent. The tax rate is 35 percent. What isthe company's target debt-equity ratio?A. 0.8745B. 1.8333C. 0.9573D. 0.9665E. 0.9205

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