Question

Dickson, Inc., has a debt-equity ratio of 2.6. The firm's weighted average cost of capital is 9 percent and its pretax cost of debt is 7 percent. The tax rate is 24 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. What would the company's weighted average cost of capital be if the company's debt- equity ratio were .50 and 1.60? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cost of equity b Unlevered cost of equity WACC if debt-equity ratio = 0.50 % C. WACC if debt-equity ratio 1.60

Answer 1

a Cost of equity (WACC-(B/V)*rd*(1-T))/(S/V) 18.57% =(9%-(2.6/3.6)*7%*(1-24%))/(1/3.6) Unlevered cost of equity b capital (Ru+Rdx(D/E)×(1-T))/(1-Rdx(D/E)x(1-T)) 10.89% =(18.57%+7%*2.6*(1-24%))/(1+2.6*(1-24%)) Ru+(D/E)x(Ru-Rp)x(1-T) Ru+(D/E)x(Ru-Rp)*(1-T) 12.37% =10.89%+0.5*(10.89%-7%)*(1-24%) 15.62% =10.89%+1.6*(10.89%-7%)*(1-24%) c) Cost of equity at D/E = 0.5 Cost of equity at D/E = 1.6 WACC if debt-equity ratio = 0.5 WACC if debt-equity ratio = 1.6 WdxRdx(1-t)+Wexke | 10.02% =0.5/1.5)*7%*(1-24%)+(1/1.5)*12.37% WdxRdx(1-t)+Wexke 9.28% =(1.6/2.6)*7%*(1-24%)+(1/2.6)*15.62%

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