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Central Systems, Inc. has a weighted average cost of capital of 8 percent. The firm has an after-tax cost of debt of 5 percent and a cost of equity

Central Systems, Inc. has a weighted average cost of capital of 8 percent. The firm has an after-tax cost of debt of 5 percent and a cost of equity of 10 percent. What is the firm's debt-equity ratio?
HINT: First get the capital structure weights. Remember they must both sum to one, so (1 - D/V) = E/V.
Now use those weights to get the debt-equity ratio.

.57
.84
.67
.77
.50

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Dear Student Please find... View the full answer

Finance- 8099596.doc

Solution:
Total weight of debt and equity = Debt (Wd) + Equity (We) = 1
WACC = Wd * Cd + We * Ce
8 = Wd * 5 + (1 – Wd) * 10
8 = 5Wd + 10 – 10Wd
Wd = 0.4
Therefore, We = 1 – 0.4 = 0.60
So,...

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