# Here is the problem:Famas's LLamas has a weighted average cost of capital of  7.9%. The company's cost of equity is 11% and its pretaxt cost of debt is 5.8%. The taxt rate is 25%. What is the company's target debt-equity ratio?Here is the solution:Here we have the WACC and need to find the debt-equity ratio of the company. Setting up the WACC equation, we find:        WACC = .0790 = .11(E/V) + .058(D/V)(1 – .25)        Rearranging the equation, we find:        .0790(V/E) = .11 + .058(.75)(D/E)        Now we must realize that the V/E is just the equity multiplier, which is equal to:        V/E = 1 + D/E        .0790(D/E + 1) = .11 + .0435(D/E)           Now we can solve for D/E as:        .0355(D/E) = .031              D/E = .8732 Question:I need help especifically with the part where they rearrange the equation as:.0790(V/E) = .11 + .058(.75)(D/E).How do they get an inverse (V/E) on the left side without the .11. And how do they get a (D/E) ratio.I understand the rest of the problem. Thanks

Question
59 views

Here is the problem:

Famas's LLamas has a weighted average cost of capital of  7.9%. The company's cost of equity is 11% and its pretaxt cost of debt is 5.8%. The taxt rate is 25%. What is the company's target debt-equity ratio?

Here is the solution:

Here we have the WACC and need to find the debt-equity ratio of the company. Setting up the WACC equation, we find:

WACC = .0790 = .11(E/V) + .058(D/V)(1 – .25)

Rearranging the equation, we find:

.0790(V/E) = .11 + .058(.75)(D/E)

Now we must realize that the V/E is just the equity multiplier, which is equal to:

V/E = 1 + D/E

.0790(D/E + 1) = .11 + .0435(D/E)

Now we can solve for D/E as:

.0355(D/E) = .031

D/E = .8732

Question:

I need help especifically with the part where they rearrange the equation as:

.0790(V/E) = .11 + .058(.75)(D/E).

How do they get an inverse (V/E) on the left side without the .11. And how do they get a (D/E) ratio.

I understand the rest of the problem. Thanks

check_circle

Step 1

Calculation of Weight of Debt:

The weight of debt is calculated using the WACC formula, where the weight of debt is assumed as X.

Step 2

Now solve for X,

By solving for X, we get the weight of debt as 0.466165.

Step 3

Calculation of Weight of Equity:

...

### Want to see the full answer?

See Solution

#### Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in