A firm has an expected return on equity of 15% and an after-tax cost of debt of 6%. What debt-equity ratio should be used in order to keep the WACC at 12%?
A) 0.50
B) 0.75
C) 0.67
D)0.33

Name: A firm has an expected return on equity of 15% and an after-tax cost of debt of 6%. What debt-equity ratio should be used in order to keep the WACC at 12%? A) 0.50 B) 0.75 C) 0.67 D)0.33
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Question

Quizplus · Accepted Answer

0.12 = (0.15)(1 - x) + 0.06x; x = 1/3D/E = (1/3)/(1 - 1/3) = 1/2, or 0.50

A Firm Has an Expected Return on Equity of 15