Crosby Industries has a debt-equity ratio of 1.5. Its WACC is 10 percent, and it

Question

Crosby Industries has a debt-equity ratio of 1.5. Its WACC is 10 percent, and its cost of debt is 5 percent. There is no corporate tax.

What is Crosby’s cost of equity capital? (Do not round intermediate calculations. Input your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What would the cost of equity be if the debt-equity ratio were 2? (Do not round intermediate calculations. Input your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

What would the cost of equity be if the debt-equity ratio were 0.6? (Do not round intermediate calculations. Input your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Crosby Industries has a debt-equity ratio of 1.5. Its WACC is 10 percent, and its cost of debt is 5 percent. There is no corporate tax.

Explanation / Answer

Requirement 1: Cost of Equity when D/E=1.5 Type of capital Proportion Cost Prop*cost Debt 1.5 0.05 0.075 Equity 1 x x WACC 0.1 Forming an equation, 0.075+x=0.1 x= 0.025 So, Cost of equity= 2.50% Requirement 2: Cost of Equity when D/E=2 Type of capital Proportion Cost Prop*cost Debt 2 0.05 0.1 Equity 1 x x WACC 0.1 Forming an equation, 0.1+x=0.1 x= 0 So, Cost of equity= 0.00% Cost of Equity when D/E=0.6 Type of capital Proportion Cost Prop*cost Debt 0.6 0.05 0.03 Equity 1 x x WACC 0.1 Forming an equation, 0.3+x=0.1 x= 0.07 So, Cost of equity= 7%

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