Weston Industries has a debt-equity ratio of 1.5. Its WACC is 11 percent, and it

Question

Weston Industries has a debt-equity ratio of 1.5. Its WACC is 11 percent, and its cost of debt is 7 percent. The corporate tax rate is 35 percent. a. What is Westons cost of equity capital? (Do not round intermediate calculations and round your final answer to 2 decimal places) What is Weston's unlevered cost of equity capital? (Do not round intermediate calculations and round your final answer to 2 decimal places) What would the cost of equity be if the debt-equity ratio were 2? (Do not round intermediate calculations and round your final answer to 2 decimal places) What would the cost of equity be if the debt-equity ratio were 1.0? (Do not round intermediate calculations and round your final answer to 2 decimal places) What would the cost of equity be if the debt-equity ratio were zero? (Do not round intermediate calculations and round your final answer to 2 decimal places)

Explanation / Answer

a]
WACC = (3/5 * 7 * 0.65) + (2/5 * Ke)
Ke = 20.675%

b] Unlevered Cost of Equity = WACC = 11%

c-1]
If D/E = 2
WACC = (2/3 * 7 * 0.65) + (1/3 * Ke )
Ke = 23.9%

c-2]
If D/E = 1
WACC = (1/2 * 7 * 0.65) + (1/2 * Ke)
Ke = 17.45%

c-3]
If D/E = 0
WACC = (0/1 * 7 * 0.65) + (1/1 * Ke)
Ke = 11%

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