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23) What proportion of a firm is equity financed if the WACC is 12%, the before-tax...

Question

23) What proportion of a firm is equity financed if the WACC is 12%, the before-tax...

23) What proportion of a firm is equity financed if the WACC is 12%, the before-tax cost of debt is 9%, the tax rate is 35%,

23) What proportion of a firm is equity financed if the WACC is 12%, the before-tax cost of debt is 9%, the tax rate is 35%, and the required return on equity is 15%? (2 points) Show all calculations and results with 1 or 2 decimals.

Answers

WACC = We*Ke + Wd*Kd*(1-T)

where

We - Weight of equity = Let We

Wd - Weight of debt = (1-We)

Ke - cost of equity = 15%

Kd - cost of debt = 9%

T - Tax rate = 35%

12 = We*15 + (1-We)*9*(1-.35)

= 15We + (1-We)*5.85

= 15We + 5.85-5.85We

15We -5.85We = 12- 5.85

9.15 We = 6.15

We = 6.15/9.15

Weight of equity = 67.21%

Weight of debt = 100-67.21 = 32.79%


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