In a perfect market, the cost of capital under a 100% equity financing strategy with cost 10%

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In a perfect market, the cost of capital under a 100% equity financing strategy with cost 10% must be the same as it is under a mixed debt and equity strategy. Therefore, wDebt . 0.05 + (1 − wDebt) . 0.2 = 0.1 ⇒

wDebt

= 2/3. This firm is 2 parts debt, 1 part equity, so the debt/equity ratio is 2.

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Corporate Finance An Introduction

ISBN: 9780321277992

1st Edition

Authors: Ivo Welch

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Question Posted: Oct 26, 2024 04:02 AM

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In a perfect market, the cost of capital under a 100% equity financing strategy with cost 10%

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Corporate Finance An Introduction

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