Chapter 18.8, Problem 2CC

Summary Introduction

To discuss: Whether the WACC method can be applied for the firm’s debt–equity ratio over times.

Introduction:

The debt–equity ratio indicates how much debt a company is using to finance its assets relative to the value of shareholders equity. This ratio is calculated by dividing company’s total liabilities by its shareholders equity; it is used to measure company’s financial leverage.

Weighted Average Cost of Capital: (WACC) is the rate that a company is expected to pay, on an average, to all the security holders in order to finance its assets.