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chadli
The firm's market value debt/equity ratio is 25%, its cost of equity is 14%, and its pretax cost of debt is 7%. What does a debt/equity ratio of 25% mean. How do I calculate my debt from the ratio
the question indicates that for every 4 dollars of equity you have a debt of 1 dollar. this implies( in absence of tax shield) : costofcapital={(25/(25+100))∗.07+(100/125)*.14} in case of tax shield i.e; if the interest on debt is exempted from tax payment. Supposing a tax rate of 40% costofcapital=(debt/capital)∗(1−Tax)∗costofdebt+(Equity/Capital)∗costofequity costofcapital=(25/125)∗(1-.4)*.07+(100/125)*.14
Thanks so much Sailu. Take care