Famas Llamas has a weighted average cost of capital of 9.8 percent. Th

QUESTION

Famas Llamas has a weighted average cost of capital of 9.8 percent. The companys cost of equity is 15 percent, and its cost of debt is 7.5 percent. The tax rate is 35 percent. What is Famas debt-quity ratio?
Weighted Average Cost of Capital (WACC)=9.8% Cost of Equity(Ke)=15% Cost of Debt(Kd)=7.5% Tax Rate (T)=35% Let Debt Equity ratio be (D/E) Putting values in formulaWACC = [Ke Kd(1-T)(D/E)] / [1 D/E] ,we get 9.8%=[15%

7.5%*(1-35%)(D/E))]/
[1 D/E] 9.8%*(1 D/E)=[15% 4.875%(D/E)] D/E(9.8%-4.875%)=15%-9.8% D/E=5.2%/4.925%=1.055 So
Famas Debt Equity ratio is 1.055

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