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).)

What would the cost of equity be if the debt-equity ratio were zero? (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

1) If D / E = 1.5, the Cost of Equity = Debt proportion * cost of debt + Equity proportion * cost of equity = WACC

= 3/5 * 5% + 2/5 * C = 10%

So on solving for C, we get COST OF EQUITY (C) = 17.50%

2a)

If D / E = 2, the Cost of Equity = Debt proportion * cost of debt + Equity proportion * cost of equity = WACC

= 2/3 * 5% + 1/3 * C = 10%

So on solving for C, we get COST OF EQUITY (C) = 20%

2b)

If D / E = 0.60, the Cost of Equity = Debt proportion * cost of debt + Equity proportion * cost of equity = WACC

= 3/8 * 5% + 5/8 * C = 10%

So on solving for C, we get COST OF EQUITY (C) = 13%

2c)

If D / E = 0, the Cost of Equity = Debt proportion * cost of debt + Equity proportion * cost of equity = WACC

= 0 * 5% + 1 * C = 10%

So on solving for C, we get COST OF EQUITY (C) = 10%

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