A company has a weighted average cost of capital of 8.9%. The company's cost of equity is 12 and its pretax cost of debt is 7.9% The tax rate is 35%. What is the company's target debt-equity ratio?

To determine the company's target debt-equity ratio, we first need to calculate the proportion of debt and equity in the company's capital structure.

The weighted average cost of capital (WACC) is a combination of the cost of debt and the cost of equity, weighted by their respective proportions in the company's capital structure. The formula to calculate WACC is as follows:

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tax Rate)

Where:
- E/V represents the proportion of equity in the capital structure.
- Re represents the cost of equity.
- D/V represents the proportion of debt in the capital structure.
- Rd represents the pre-tax cost of debt.
- Tax Rate represents the corporate tax rate.

Given:
- WACC = 8.9%
- Re = 12%
- Rd = 7.9%
- Tax Rate = 35%

Let's substitute these values into the WACC formula and solve for E/V and D/V.

8.9% = (E/V) * 12% + (D/V) * 7.9% * (1 - 35%)

Now, we can solve for E/V and D/V.

8.9% - (D/V) * 2.585% = (E/V) * 12%
(D/V) * 2.585% = 12% - 8.9%
(D/V) * 2.585% = 3.1%

Next, isolate D/V:

(D/V) = 3.1% / 2.585%
(D/V) = 1.199

Now, we know that the debt-equity ratio (D/E) is the inverse of the debt-to-value ratio (D/V). Thus, the target debt-equity ratio is:

D/E = 1 / (D/V)
D/E = 1 / 1.199
D/E ≈ 0.834

Therefore, the company's target debt-equity ratio is approximately 0.834 or 83.4%.