Williamson, Inc., has a debt-equity ratio of 2.49. The company\'s weighted avera

Question

Williamson, Inc., has a debt-equity ratio of 2.49. The company's weighted average cost of capital is 11 percent, and its pretax cost of debt is 5 percent. The corporate tax rate is 30 percent. a. What is the company's cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.) Cost of equity capital 968% b. What is the company's unlevered cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16,) Unlevered cost of equity -2000 % C.What would the weighted average cost of capital be if the company's debt-equity ratio were 60 and 150? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g. 32.16.) Weighted average cost of capital Debt-equity ratio .60 Debt-equity ratio 1.50 12.4

Explanation / Answer

Cost of debt = 5%

After tax cost of debt = 5%(1-0.30)= 3.5%

Cost of equity = 29.68%

Assume Debts 150 & equity is 100 so D/E = 1.5

So weight of Debt is = 150 /(150+100) = 0.6

Equity weight = 100/250 = 0.4

WACC = (0.6*3.5%)+(0.4*29.68%)

= 13.97%

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