Question

The WACC for a firm is 13.00 percent. You know that the firm's cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt? Assume the firm pays no tax..

A) 30%
B) 33%
C) 50%
D) 70%

Answer 1

The proportion of the firm that is financed with debt is 70%.

Step-by-step explanation:

To determine the proportion of the firm that is financed with debt, we can use the weighted average cost of capital (WACC) formula:

WACC = (Weight of Debt x Cost of Debt) + (Weight of Equity x Cost of Equity)

Given that WACC = 13%, Cost of Debt = 10%, and Cost of Equity = 20%, we can let 'x' represent the weight of debt:

0.13 = (x x 0.10) + ((1-x) x 0.20)

0.13 = 0.10x + 0.20 - 0.20x

0.13 = -0.10x + 0.20

-0.07 = -0.10x

x = 0.07/0.10

x = 0.7

The firm is financed with debt at a proportion of 70%, which corresponds to answer choice D).