Weston Industries has a debt–equity ratio of 1.1. Its WACC is 9.6 percent, and i

Question

Weston Industries has a debt–equity ratio of 1.1. Its WACC is 9.6 percent, and its cost of debt is 7.2 percent. The corporate tax rate is 35 percent. a. What is Weston’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 % b. What is Weston’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 capital % c-1 What would the cost of equity be if the debt-equity ratio were 2? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Cost of equity % c-2 What would the cost of equity be if the debt-equity ratio were 1? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Cost of equity % c-3 What would the cost of equity be if the debt-equity ratio were zero? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Cost of equity % HintsReferenceseBook & Resources Hint #1 Check my work

Explanation / Answer

a.

C-1:

C-2:

C-3

If debt equity ratio is 1.1 Debt 1.1 Cost of debt 7.2 Equity 1 tax 35% after tax cost of debt 4.68 2.1 WACC = Cost of equity*Weight of equity+after tax cost of debt*weight of debt 9.6 = (Cost of equity*1/2.1)+(4.68*1.1/2.1) 9.6 = (Cost of equity*.48)+2.45 Cost of equity = (9.6-2.45)/.48 =         14.90 Thus, cost of equity is 14.90%

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