Swirlpool, Inc. has a WACC of 11%, cost of debt of 8%, and a cost of equity of 12%. What must the debt-to-equity ratio be?
A) 1/2
B) 1/4
C) 1/6
D) 1/3

Question

Quizplus · Accepted Answer

We can use the WACC formula to solve for the debt-to-equity ratio:
WACC = (E/V) x Cost of Equity + (D/V) x Cost of Debt x (1 - Tax Rate)
where E is the market value of equity, D is the market value of debt, V is the total market value of the firm (E + D), and Tax Rate is the corporate tax rate.
Plugging in the given values, we get:
0.11 = (0.88/(0.88+D/V)) x 0.12 + (D/V/(0.88+D/V)) x 0.08 x (1-0.21)
Solving for D/V, we get:
D/V = 0.50
So, the debt-to-equity ratio must be 1/2 or 0.50. Therefore, the correct answer is D.