Skillet Industries has a debt–equity ratio of 1.3. Its WACC is 6.0 percent, and

Question

Skillet Industries has a debt–equity ratio of 1.3. Its WACC is 6.0 percent, and its cost of debt is 5.8 percent. The corporate tax rate is 35 percent.

Please correct the wrong answers

a. What is the company's cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16) Cost of equity capital 8.90 % b. What is the company's unlevered cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16)) Unlevered cost of equity capital 4.82 0% c-1 What would the cost of equity be if the debt-equity ratio were 2? (Round your answer to 2 decimal places. (e.g., 32.16) Cost of equity 10.46 % c-2 What would the cost of equity be if the debt-equity ratio were 1.0 (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity 8.23 * % c-3 What would the cost of equity be if the debt-equity ratio were zero? (Round your answer to 2 decimal places. (e.g., 32.16) Cost of equity 60 %

Explanation / Answer

B)

RE = RU + (RU – RD)(D/E)(1 – TC)

0.0890 = RU + (RU – 0.058)(1.3)(1 – 0.35)

0.0890 = RU + 0.845RU - 0.0490

1.845 RU = 0.138

RU = 7.48%

C-1

WACC = (E/V)RE + (D/V)RD(1 – TC)

0.06 = (1/3)RE + (2/3)(0.058)(1 – 0.35)   

0.06 = (1/3)RE + 0.0251

(1/3)RE = 0.0349

RE = 10.47%

C-2

WACC = (E/V)RE + (D/V)RD(1 – TC)

0.06 = (1/2)RE + (1/2)(0.058)(1 – 0.35)   

0.06 = (1/2)RE + 0.01885

(1/2)RE = 0.04115

RE = 8.23%

C-3

WACC = (E/V)RE + (D/V)RD(1 – TC)

0.06 = (1)RE + (0)(0.058)(1 – 0.35)      

0.06 = (1)RE + 0

RE = 6%

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