8.) Twice Shy Industries has a debtequity ratio of 1.4. Its WACC is 8 percent, a
ID: 2743859 • Letter: 8
Question
8.) Twice Shy Industries has a debtequity ratio of 1.4. Its WACC is 8 percent, and its cost of debt is 5.9 percent. The corporate tax rate is 35 percent.
c-1
What would the cost of equity be if the debtequity ratio were 2? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What would the cost of equity be if the debtequity ratio were 1.0? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What would the cost of equity be if the debtequity ratio were zero? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What would the cost of equity be if the debtequity ratio were 2? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Explanation / Answer
WACC = Cost of Equity*weight of equity + cost of debt*(1-tax)*weight of debt
Answer 1.
WACC = Cost of Equity*weight of equity + cost of debt*(1-tax)*weight of debt
0.08 = Cost of Equity*2/3 + 0.059*(1-0.35)*1/3
0.24 = cost of equity*2 + 0.03835
Cost of equity = 0.1008
Cost of Equity = 10.08%
Answer 2.
WACC = Cost of Equity*weight of equity + cost of debt*(1-tax)*weight of debt
0.08 = Cost of Equity*1/2 + 0.059*(1-0.35)*1/2
0.16 = cost of equity + 0.03835
Cost of equity = 0.1217
Cost of Equity = 12.17%
Answer 3.
WACC = Cost of Equity*weight of equity + cost of debt*(1-tax)*weight of debt
0.08 = Cost of Equity*1 + 0.059*(1-0.35)*0
0.08 = cost of equity + 0
Cost of equity = 8.00%
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