Practice Problem – Cost of Debt

Practice Question

Cases in Finance
Cost of Capital
Cost of Debt
Short Answer

If a company has a debt-to-equity ratio of 0.5, what does this imply about its capital structure?

Answer +
C
Step-by-step solutions +
A debt-to-equity ratio of 0.5 means that for every $1.00 of equity, the company has $0.50 of debt. This indicates a capital structure that is weighted more toward equity than debt. It suggests the firm is relatively conservative in its use of leverage, potentially reducing financial risk but also possibly limiting the benefits of debt financing such as tax shields.