Williamson, Inc., has a debt-equity ratio of 2.44. The firm\'s weighted average
ID: 2648398 • Letter: W
Question
Williamson, Inc., has a debt-equity ratio of 2.44. The firm's weighted average cost of capital is 9 percent, and its pretax cost of debt is 7 percent. Williamson is subject to a corporate tax rate of 40 percent a. What is Williamson's cost of equity capital? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Cost of equity capital b. What is Williamson's unlevered cost of equity capital? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Unlevered cost of equity c. What would Williamson's weighted average cost of capital be if the firm's debt-equity ratio were .60 and 1.75? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16) Weighted average cost of capital Debt-equity ratio .60 Debt-equity ratio 1.75Explanation / Answer
Solution:
Cost of equity :
= WACC - (Cost of debt x Weight of debt) / Weight of equity
Cost of debt = Interest rate x (1-tax)
= 7% x (1-0.40)
= 4.2% …………(1)
Weight of Debt = 2.44 / (2.44 + 1)
= 0.7093……………(2)
Weight of equity = 1 - weight of debt
= 1- 0.7093
= 0.2907…………….(3)
Substituting the values 1 , 2 and 3 in the above formula
= WACC - (Cost of debt x Weight of debt) / Weight of equity
= 9- (4.2% x 0.7093) / 0.2907
= 9 - 0.0297906 / 0.2907
= 30.85
3 a) WACC = Cost of Debt x Weight of Debt + Cost of Equity x Weight of Equity 9 = 4.2 x 0.7093 + Cost of equity x 0.2907
Cost of equity = (9- 2.9791) / 0.2907
= 20.71%
3 b) WACC = Cost of Debt x Weight of Debt + Cost of Equity x Weight of Equity 9 = Cost of Debt x 0.7093 + 0.2071 x 0.2907
9 = Cost of Debt x 0.7093 + 0.0602
Cost of Debt = (9 - 0.0602) / 0.7093
= 12.60%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.