Crosby Industries has a debt-equity ratio of 1.3. Its WACC is 15 percent, and it

Question

Crosby Industries has a debt-equity ratio of 1.3. Its WACC is 15 percent, and its cost of debt is 8 percent. There is no corporate tax. Requirement 1: 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).) Cost of equity % Requirement 2: (a) 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).) Cost of equity % (b) What would the cost of equity be if the debt-equity ratio were 0.7? (Do not round intermediate calculations. Input your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity % (c) 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).) Cost of equity %

Explanation / Answer

WACC = Wd×Rd×(1-t)+We×Ke

W is weights of respective portfolios

R is return on respective portfolios

15% = (1.3÷2.3)×8%+(1÷2.3)×Ke

Cost of equity, Ke = 24.10%

15% = (2÷3)×8%+(1÷3)×Ke

Cost of equity, Ke = 29%

15% = (0.7÷1.7)×8%+(1÷1.07)×Ke

Cost of equity, Ke =12.53%

15% = (1÷1)×Ke

Cost of equity, Ke =15%

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