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Homework answers / question archive / Fairfax, Inc

Fairfax, Inc

Finance

Fairfax, Inc. wants to have a weighted average cost of capital of 8.2%. The firm has an after-tax cost of debt of 5.8% and a cost of equity of 12%. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

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WACC= 8.2%

COST OF DEBT(D)= 5.8%

COST OF EQUITY(E) = 12%

So,

8.2 = 5.8 (1- w) + 12 * w

8.2= 5.8 -5.8w + 12w

6.2w= 2.4

w= 0.39

 

Weightage of debt = 1- 0.39

= 0.61

 

Debt-equity Ratio= Debt weightage/Equity Weightage

=0.61 /0.39

= 1.56

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