M&M Proposition 2: Swirlpool, Inc., has a WACC of 11%, a cost of debt of 8%, and a cost of...1 answer below »

M&M Proposition 2: Swirlpool, Inc., has a WACC of 11%, a cost of debt of 8%, and a cost of equity of 12%. What must the debt-to-equity ratio be?

1/2

1/4

None of these.

1/6

Jun 10 2021 12:53 PM

1 Approved Answer

Sanjiv C
answered on
June 12, 2021

5
Ratings,(17 Votes)

Let us assume that debt as a % of total funds = x. Then equity's share will be (100-x) %. Therefore, the WACC based on given cost data and aforesaid assumptions will be as follows: WACC = x/100 * 0.08 + (100-x)/100 * 0.12 = 0.08x /100 + (12 - 0.12x) /100 = (0.08x + 12 - 0.12x) /100 = (12 - 0.04x) / 100 But WACC = 11 % = 0.11. therefore, (12 - 0.04x) / 100 = .11 => (12 - 0.04...

x) = .11 * 100 = 11 = > 12 - 0.04 x = 11 = > 0.04 x = 12-11 => .04 x = 1 => x = 1 / 0.04 = 25 % Therefore debt is 25 % and equity is 75 %. Debt Equity Ratio = Debt / Equity = 25 % / 75 % = 1 /3 Therefore, the correct option is C - None of these

## 1 Approved Answer

June 12, 2021## Do you need an answer to a question different from the above? Ask your question!

Tell us more

(Hide this section if you want to rate later)

Was the final answer of the question wrong?

Were the solution steps not detailed enough?

Was the language and grammar an issue?

Does the question reference wrong data/report

or numbers?

Stay Solved :)

5 seconds## Didn't find yours?

Ask a new questionGet plagiarism-free solution within 48 hours

Review Please