The following data applies to LeVeit Co. Leveit has a target D/E ratio of .5 Leviet’s Bonds are currently yielding 10% LeVeit is a constant growth firm that just paid a $3 divident Leviet’s stock sells for 31.5 ROE is 20% Dividend payout is 75% The companys marginal tax rate is 40% What is the company’s WACC A. 10.5 B 11 C 12 D 12.5

r = ? D0 = 3 g = .2 * .25 = .05 (ROE * Retention Ratio) P = 31.5 = 3 * 1.05 / (r - .05) so D = 1/3, E=2/3 WACC = 1/3 * 10 * (1-.4) + 2/3 * 15 = 2 + 10 = 12% Choice C

Interesting. Thx

I need help with the breakdown of the ratios. In the above example, is there a formula for the breakdown of “target D/E ratio of .5”? The rest I understand it’s just breaking down of the target ratios that throws me a bit. Thanks.

that just means D/E = 0.5 and since D+E = 1 1.5 E = 1 E = 2/3 and D = 1/3

Thanks, CP.