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Calculating a Firm's Target Debt-Equity Ratio

Firm Y has a cost of equity of 16.5 percent and a pre-tax cost of debt of 7.4 percent. The firm's target weighted average cost of capital is 11.5 percent and its tax rate is 34 percent. What is the firm's target debt-equity ratio?

1. .58
2. .62
3. .67
4. .71
5. .76

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WACC = Proportion of debt X after tax cost of debt + Proportion of equity X cost of ...

Solution Summary

The solution explains how to calculate the Debt-Equity Ratio