Question

Weston Industries has a debt-equity ratio of 1.6. Its WACC is 7.8 percent, and its cost of debt is 5.5 percent. The corporate tax rate is 21 percent.

  

a.	What is the company’s cost of equity capital?
b.	What is the company’s unlevered cost of equity capital?
c-1.	What would the cost of equity be if the debt-equity ratio were 2?
c-2.	What would the cost of equity be if the debt-equity ratio were 1.0?
c-3.	What would the cost of equity be if the debt-equity ratio were zero?

Answer 1

Below I have attached solution for this

debt epeaty latio = 1.6 WACC = 7.8% Cost of debt-55% Corporate tax = 21% la) Cost of equity Weight of * After dan debt cost of debt tweyht capital of equits] = 27.8%- (18/+16)* 15%*(1-21%)], 84 161) ] - 13.328% = [718 - (116) 0015) (0.79)), = 51126153) (226) -13.328%

Unlieverd cost of equity capital = - [levered cont of equity + Debt er ang in Cost of ratio debt" (It det er mang ( de ) = (13.328 + 116*55* (1-0.211), (1+1:6 *(1-21%) 9.8754% cost of = equity : Unleverd cost + DE* of equity Unlevend cost of - chaty cost of debt)*(1 day satell - (9.87 34 + 2* (9.8734 - S15%)*(1-21%) = 16.783

cost of equity 69-8734 + 1* (9.8734-85%) (1–21%1] 13328 % cast of eputy = (9.8734+0 (9.5794-5%) [1-41%)) - 9.8734 %