Crosby Industries has a debt-equity ratio of 1.2. Its WACC is 14 percent, and it

Question

Crosby Industries has a debt-equity ratio of 1.2. Its WACC is 14 percent, and its cost of debt is 9 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 1.2. Its WACC is 14 percent, and its cost of debt is 9 percent. There is no corporate tax.

Explanation / Answer

WACC = Wd×Rd×(1-t)+We×Ke

W is weights of respective portfolios

R is return on respective portfolios

14% = (1.2÷2.2)×9%+(1÷2.2)×Ke

Cost of equity = 20%

14% = (2÷3)×9%+(1÷3)×Ke

Cost of equity = 24%

14% = (0.6÷1.6)×9%+(1÷1.6)×Ke

Cost of equity = 17%

14% = 1×Ke

Cost of equity = 14%

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