The WACC of a firm equals 10.67%. The pre-tax cost of debt equals 8.4%, the firm pays 38% taxes and the firm's equity holders expect a rate of return of 17%.
The firm's debt-to-equity ratio equals ________.
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A. B. C. D.C
Let E/(D+E) =
A. Then,
WACC = (1-A)*(1-t)*RD + A*RE, where t is the tax rate. Therefore,
10.67% = (1-A)*(1-38%)*8.4% + A*17%. Hence, A = E/(D+E) = 0.463 and (D+E)/E = 1/0.463 = 2.16.
This gives D/E = 1.16.