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Homework answers / question archive / Fisheries Ltd has a target debt to equity ratio of 50%
Fisheries Ltd has a target debt to equity ratio of 50%. Currently, its book debt to equity ratio is 70%, which is considered to be a temporary state by its management and would likely revert to the target ratio in the near future. The company has an after-tax market cost of debt of 10% and a market cost of equity of 20%. What is the weighted average cost of capital (WACC) for the company?
a. 10.00%
b. 15.70%
c. 16.66%
d. 33.33%
Computation of Weighted Average Cost of Capital (WACC) for the company:
Weighted Average Cost of Capital (WACC) = After tax Cost of Debt*Weight of Debt + Cost of Equity*Weight of Equity
Here,
Target debt to equity ratio = 50% or 0.50
So,
Weight of Debt = 0.50/(1+0.50) = 0.50/1.50
Weight of Equity = 1/(1+1.50) = 1/1.50
Weighted Average Cost of Capital (WACC) = 10%*0.50/1.50 + 20%*1/1.50 = 16.66%
