a)
WACC = (E/V) Requity + (D/V) Rdebt (1 – Tax )
Debt to equity = 1.8
lets assume debt = 1.8 and equity is 1
total V = 2.8
E/V = 1/2.8
D/V = 1.8/2.8
WACC = 0.091 = (1/2.8) * Requity + (1.8/2.8) * 0.071 * (1-0.35)
0.061332 = (1/2.8) * Requity
Requity = 17.17
b)
Requity = Runlevered + ( Runlevered – Rdebt )( D/E )(1 – Tax )
0.1717 = Runlevered + ( Runlevered - 0.071) * 1.8 * 0.65
Runlevered = 11.74%
c-1)
We can use the same formula as mentioned above in b
Requity = Runlevered + ( Runlevered – Rdebt )( D/E )(1 – Tax )
= 0.1174 + (0.1174 - 0.071) * 2 * 0.65
= 17.77%
c-2)
At D/E = 1
Requity = Runlevered + ( Runlevered – Rdebt )( D/E )(1 – Tax )
= 0.1174 + (0.1174 - 0.071) * 1 * 0.65
= 14.75
c-3)
At D/E = 0
Requity = Runlevered + ( Runlevered – Rdebt )( D/E )(1 – Tax )
= 0.1174 + (0.1174 - 0.071) * 0 * 0.65
= 11.74%
Here Requity = Runlevered
Twice Shy Industries has a debt-equity ratio of 1.8. Its WACC is 9.1 percent, and its...
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