Crosby Industries has a debt-equity ratio of 1.7. Its WACC is 11 percent, and it

Question

Crosby Industries has a debt-equity ratio of 1.7. Its WACC is 11 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).) Requirement 2: 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 0.7? (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).)

Explanation / Answer

WACC = Wd×Rd×(1-t)+We×Ke

W is weights of respective portfolios

R is return on respective portfolios

0.11 = (1.7÷2.7)×0.08+(1÷2.7)×Ke

Cost of equity, Ke = 16.10%

0.11 = (2÷3)×0.08+(1÷3)×Ke

Cost of equity, Ke = 17%

0.11 = (0.7÷1.7)×0.08+(1÷1.7)×Ke

Cost of equity, Ke = 13.1%

0.11 = (1÷1)×Ke

Cost of equity, Ke = 11%

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