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
Here is the problem:
Famas's LLamas has a weighted average cost of capital of 7.9%. The company's
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
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