Question
Weston Industries has a debt-equity ratio of 1.3. Its WACC is 7.5 percent, and its cost...
| Weston Industries has a debt-equity ratio of 1.3. Its WACC is 7.5 percent, and its cost of debt is 5.2 percent. The corporate tax rate is 23 percent. |
| a. | What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| b. | What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c-1. | What would the cost of equity be if the debt-equity ratio were 2? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c-2. | What would the cost of equity be if the debt-equity ratio were 1.0? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c-3. | What would the cost of equity be if the debt-equity ratio were zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
Answers
WACC = We x Ke + Wd x Kd(after tax) 0.075 = (1/2.3) x ke +(1.3/2.3) x (0.04004) ke = cost of equity = 12.04% Re = Ra +(Ra-Rd) (D/E) (1-t) Ra = unlevered cost of equity Ra = 12.04% -[1.001Ra-1.001Rd] Ra = Unlevered cost of equity = 8.62% C-1) If Debt equity = 2.0 cost of equity = Re = Ra + (Ra-Rd)(D/E)(1-t) Ra = unlevered cost of equity = 13.89% 0.0862+((0.0862-0.052)*(2)*(1-0.23)) C-2) If Debt equity=1 cost of equity = Re - Ra +(Ra-Rd)(D/E)(1-t) Ra = unlevered cost of equity = 11.25% 0.0862+((0.0862-0.052) * (1) *(1-0.23)) c-3) if debt equity = 0; cost of equity = Ra = 8.62%
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