Famas Llamas has a WACC of 8.65 percent. The companys cost of equity is 11 percent, and its cost of debt is 6 percent. The tax rate is 35 percent. What is Famas target debt- equity ratio?

Here, we have the WACC and need to find the debt-equity ratio of the company. Setting up the WACC equation, we find:

WACC = .0865 = .11(E/V) + .06(D/V)(1 .35)

Rearranging the equation, we find:

.0865(V/E) = .11 + .06(.65)(D/E)

Now we must realize that the V/E is just the equity multiplier, which is equal to:

V/E = 1 + D/E

.0865(D/E + 1) = .11 + .039(D/E)

Now, we can solve for D/E as:

.0475(D/E) = .0235 (How do you get the .0235)?

D/E = .4947