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Wolverine World Wide Inc. (NYSE Ticker: WWW) has only common stocks and bonds outstanding with a target debt-equity ratio of 0.6. What are the target-level capital structure weights for WWW?

A. 30% of debt and 50% of equity
B. 37.5% of debt and 62.5% of equity
C. 40% of debt and 60% of equity
D. 60% of debt and 40% of equity

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Answer:

B. 37.5% of debt and 62.5% of equity

Explanation:

debt equity ratio = debt (d) /equity (e)

Given that d/e ratio = 0.6

debt is 0.6 times equity then => equity = 0.6 debt

0.6 = debt/equity

0.6 = debt /0.6 debt

equity = 1

the weights of debt and equity =

            equity = 1/1+0.6 * 100

                        = 62.5 %

            debt    = 0.6/1+0.6 * 100

                        = 37.5%

The target-level capital structure weights for WWW, According to the statement the correct answer is B. 37.5% of debt and 62.5% of equity

Calculation of Capital structure weights

When the debt equity ratio is = debt (d) /equity (e)

After that Given that d/e ratio is = 0.6

Then debt is 0.6 times equity then => equity is = 0.6 debt

0.6 is = debt/equity

Then 0.6 is = debt /0.6 debt

The equity is = 1

Then the weights of debt and equity

equity is = 1/1+0.6 * 100

Then = 62.5 %

When debt is = 0.6/1+0.6 * 100

Therefore, = 37.5%

Find more information about Capital structure weights here:

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