The Border Crossing has no debt and a cost of capital of 12.2 percent.The shareholders would prefer to earn rate of return of 16.4 percent.What debt-equity ratio will be required to meet the shareholder's preference if the firm pays no taxes and can borrow at 6.2 percent?
A)67%
B)33%
C)54%
D)46%
E)70%

Question

Quizplus · Accepted Answer

0.164 = 0.122 + (B / S)(0.122 - 0.062)
B / S = 0.70,or 70%

The Border Crossing Has No Debt and a Cost of Capital