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To help you with this problem, I will use the table and the tax rate of 50% to calculate the Weighted Average Cost of Capital (WACC) for each debt-equity mix percentage.

### The formula for WACC is:
\[
WACC = \left( E/V \times Re \right) + \left( D/V \times Rd \times (1 - Tc) \right)
\]
Where:
- \(E/V\) is the proportion of equity in the total capital.
- \(D/V\) is the proportion of debt in the total capital.
- \(Re\) is the cost of equity.
- \(Rd\) is the cost of debt before tax.
- \(Tc\) is the tax rate.

I'll compute the WACC for each mix and suggest the best debt-equity mix based on the lowest WACC.

1. **0% Debt (100% Equity)**:
   - \(D/V = 0\), \(E/V = 1\)
   - \(Re = 16\%\), \(Rd = 12\%\), \(Tc = 50\%\)
   - \(WACC = 1 \times 16\% + 0 = 16\%\)

2. **20% Debt, 80% Equity**:
   - \(D/V = 0.2\), \(E/V = 0.8\)
   - \(Re = 16\%\), \(Rd = 12\%\)
   - \(WACC = (0.8 \times 16\%) + (0.2 \times 12\% \times (1 - 0.5))\)
   - \(WACC = 12.8\% + 1.2\% = 14\%\)

3. **40% Debt, 60% Equity**:
   - \(D/V = 0.4\), \(E/V = 0.6\)
   - \(Re = 20\%\), \(Rd = 16\%\)
   - \(WACC = (0.6 \times 20\%) + (0.4 \times 16\% \times (1 - 0.5))\)
   - \(WACC = 12\% + 3.2\% = 15.2\%\)

4. **50% Debt, 50% Equity**:
   - \(D/V = 0.5\), \(E/V = 0.5\)
   - \(Re = 22\%\), \(Rd = 20\%\)
   - \(WACC = (0.5 \times 22\%) + (0.5 \times 20\% \times (1 - 0.5))\)
   - \(WACC = 11\% + 5\% = 16\%\)

5. **60% Debt, 40% Equity**:
   - \(D/V = 0.6\), \(E/V = 0.4\)
   - \(Re = 24\%\), \(Rd = 22\%\)
   - \(WACC = (0.4 \times 24\%) + (0.6 \times 22\% \times (1 - 0.5))\)
   - \(WACC = 9.6\% + 6.6\% = 16.2\%\)

6. **75% Debt, 25% Equity**:
   - \(D/V = 0.75\), \(E/V = 0.25\)
   - \(Re = 28\%\), \(Rd = 24\%\)
   - \(WACC = (0.25 \times 28\%) + (0.75 \times 24\% \times (1 - 0.5))\)
   - \(WACC = 7\% + 9\% = 16\%\)

### Conclusion:
- The lowest WACC occurs with **20% debt and 80% equity**, resulting in a **14% WACC**. Thus, this is the best debt-equity mix for the company.

Would you like more details on the calculations or any other clarification?

Here are 5 questions you might explore next:
1. How would changes in the tax rate affect the WACC for different debt-equity mixes?
2. Why does increasing debt initially decrease the WACC but then increase it?
3. How do real-world companies decide on their optimal debt-equity mix?
4. What are the risks associated with a higher debt-equity ratio despite lower initial WACC?
5. How does the cost of capital affect a company's valuation?

**Tip:** Companies with high debt must be cautious of rising interest rates, as they can significantly increase the cost of debt over time.

PQ Ltd estimates the cost of equity and debt components of its capital for different levels of debt-equity mix. Suggest the best debt-equity mix for the company. Tax rate is 50%.

Explore the calculation of Weighted Average Cost of Capital (WACC) for PQ Ltd to determine the optimal debt-equity mix. A step-by-step analysis shows that a 20% debt and 80% equity mix offers the lowest WACC at 14%, making it the best choice. Suitable for finance students.

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