Your boss, whose background is in financial planning, is concerned about the companys high weighted average cost of capital (WACC) of 26%. He has asked you to determine what combination of debt-equity financing would lower the companys WACC to 16%. If the cost of the companys equity capital is 6% and the cost of debt financing is 26%, what debt-equity mix would you recommend?

The debt-equity mix should be 50 Numeric Response 1.Edit Unavailable. 50 correct.% debt and 50 Numeric Response 2.Edit Unavailable. 50 correct.% equity financing.

Explanation

Let x be the percentage of debt financing.

Then, 1 x is the percentage of equity financing.

0.16 = x(0.26) + (1 - x) (0.06)0.16 = x0.26 + 1 - x 0.06

0.2x = 0.10.2x = 0.1

x = 50%

Could you please make the cash flow diagram for me? I'm not sure how to complete it for this problem.