Your boss, whose background is in financial planning, is concerned about the company’s high weighted average cost of capital (WACC) of 26%. He has asked you to determine what combination of debt-equity financing would lower the company’s WACC to 16%. If the cost of the company’s equity capital is 6% and the cost of debt financing is 26%, what debt-equity mix would you recommend? The debt-equity mix should be 50 Numeric Response 1.Edit Unavailable. 50 correct.% debt and 50 Numeric Response 2.Edit Unavailable. 50 correct.% equity financing. Explanation Let x be the percentage of debt financing. Then, 1 − x is the percentage of equity financing. 0.16 = x(0.26) + (1 - x) × (0.06)0.16 = x0.26 + 1 - x × 0.06 0.2x = 0.10.2x = 0.1 x = 50% Could you please make the cash flow diagram for me? I'm not sure how to complete it for this problem.
Your boss, whose background is in financial planning, is concerned about the company’s high weighted average cost of capital (WACC) of 26%. He has asked you to determine what combination of debt-equity financing would lower the company’s WACC to 16%. If the cost of the company’s equity capital is 6% and the cost of debt financing is 26%, what debt-equity mix would you recommend? The debt-equity mix should be 50 Numeric Response 1.Edit Unavailable. 50 correct.% debt and 50 Numeric Response 2.Edit Unavailable. 50 correct.% equity financing. Explanation Let x be the percentage of debt financing. Then, 1 − x is the percentage of equity financing. 0.16 = x(0.26) + (1 - x) × (0.06)0.16 = x0.26 + 1 - x × 0.06 0.2x = 0.10.2x = 0.1 x = 50% Could you please make the cash flow diagram for me? I'm not sure how to complete it for this problem.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Your boss, whose background is in financial planning, is concerned about the company’s high weighted average cost of capital (WACC) of 26%. He has asked you to determine what combination of debt-equity financing would lower the company’s WACC to 16%. If the cost of the company’s equity capital is 6% and the cost of debt financing is 26%, what debt-equity mix would you recommend?
The debt-equity mix should be 50 Numeric Response 1.Edit Unavailable. 50 correct.% debt and 50 Numeric Response 2.Edit Unavailable. 50 correct.% equity financing.
Explanation
Let x be the percentage of debt financing.
Then, 1 − x is the percentage of equity financing.
0.16 = x(0.26) + (1 - x) × (0.06)0.16 = x0.26 + 1 - x × 0.06
0.2x = 0.10.2x = 0.1
x = 50%
Could you please make the cash flow diagram for me? I'm not sure how to complete it for this problem.
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