Skillet Industries has a debt–equity ratio of 1.7. Its WACC is 9.2 percent, and its cost of debt is 6.2 percent. The corporate tax rate is 35 percent. |
a. |
What is the company’s cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16)) |
Cost of equity capital | % |
b. |
What is the company’s unlevered cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16)) |
Unlevered cost of equity capital | % |
c-1 |
What would the cost of equity be if the debt–equity ratio were 2? (Round your answer to 2 decimal places. (e.g., 32.16)) |
Cost of equity | % |
c-2 |
What would the cost of equity be if the debt–equity ratio were 1.0? (Round your answer to 2 decimal places. (e.g., 32.16)) |
Cost of equity | % |
c-3 |
What would the cost of equity be if the debt–equity ratio were zero? (Round your answer to 2 decimal places. (e.g., 32.16)) |
Cost of equity | % |
D/A = D/(E+D) | |||||||||
D/A = 1.7/(1+1.7) | |||||||||
=0.6296 | |||||||||
E/A = 1-D/A | |||||||||
=1-0.6296 | |||||||||
=0.3704 | |||||||||
a | |||||||||
WACC = Levered cost of equity*E/A+Cost of debt*(1-tax rate)*D/A | |||||||||
0.092= Levered cost of equity*0.3704+0.062*(1-0.35)*0.6296 | |||||||||
Levered cost of equity =17.99% | |||||||||
b | |||||||||
Levered cost of equity = Unlevered cost of equity+D/E*( Unlevered cost of equity-cost of debt)*(1-tax rate) | |||||||||
0.17989 = Unlevered cost of equity+1.7*(Unlevered cost of equity-0.062)*(1-0.35) | |||||||||
Unlevered cost of equity = 11.8 | |||||||||
C-1 | |||||||||
Levered cost of equity = Unlevered cost of equity+D/E*( Unlevered cost of equity-cost of debt)*(1-tax rate) | |||||||||
Levered cost of equity = 11.8+2*(11.8-6.2)*(1-0.35) | |||||||||
Levered cost of equity = 19.08 | |||||||||
C-2 | |||||||||
Levered cost of equity = Unlevered cost of equity+D/E*( Unlevered cost of equity-cost of debt)*(1-tax rate) | |||||||||
Levered cost of equity = 11.8+1*(11.8-6.2)*(1-0.35) | |||||||||
Levered cost of equity = 15.44 | |||||||||
C-3 | |||||||||
Levered cost of equity = Unlevered cost of equity+D/E*( Unlevered cost of equity-cost of debt)*(1-tax rate) | |||||||||
Levered cost of equity = 11.8+0*(11.8-0.062)*(1-0.35) | |||||||||
Levered cost of equity = 11.8 |
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