Debt Equity Ratio = 2.4 / 1
Total Weight = 2.4 +1 = 3.4
Weight of Debt = 2.4/ 3.4 = 70.59%
Weight of Equity = 100% - 70.59% = 29.41%
WACC = Cost of Equity * Weight of Equity + Cost of Debt after tax * Weight of Debt
0.09 = Cost of Equity * 0.2941 + 0.07(1-0.25) * 0.7059
0.09 = Cost of Equity * 0.2941 + 0.03705975
Cost of Equity = (0.09 - 0.03705975) / 0.2941
Cost of Equity = 0.1800 OR 18%
Answer B)
Unlevered Cost of Equity is equal to pretax WACC
Pretax WACC = Cost of Equity * Weight of Equity + Cost of Debt pre tax * Weight of Debt
= 0.18 * 0.2941 + 0.07 * 0.7059
= 0.102351 OR 10.24%
Answer C)
Debt Equity Ratio = 0.7 / 1
Total Weight = 0.7 +1 = 1.7
Weight of Debt = 0.7/ 1.7 = 41.18%
Weight of Equity = 100% - 41.18% = 58.82%
WACC = Cost of Equity * Weight of Equity + Cost of Debt after tax * Weight of Debt
= 0.18 * 0.5882 + 0.07(1-0.25) * 0.4118
= 12.75%
Debt Equity Ratio = 1.4 / 1
Total Weight = 1.4 +1 = 2.4
Weight of Debt = 1.4/ 2.4= 58.33%
Weight of Equity = 100% - 58.33% = 41.67%
WACC = Cost of Equity * Weight of Equity + Cost of Debt after tax * Weight of Debt
= 0.18 * 0.4167 + 0.07(1-0.25) * 0.5833
= 10.56%
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