Williamson, Inc., has a debt–equity ratio of 2.55. The firm’s weighted average c

Question

Williamson, Inc., has a debt–equity ratio of 2.55. The firm’s weighted average cost of capital is 11 percent, and its pretax cost of debt is 5 percent. Williamson is subject to a corporate tax rate of 30 percent.

  

  

  

What is Williamson’s unlevered cost of equity capital? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  

  

What would Williamson’s weighted average cost of capital be if the firm’s debt–equity ratio were .85 and 1.75? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

  

Williamson, Inc., has a debt–equity ratio of 2.55. The firm’s weighted average cost of capital is 11 percent, and its pretax cost of debt is 5 percent. Williamson is subject to a corporate tax rate of 30 percent.

Explanation / Answer

a.

Cost of Equity

c. When debt-Equity ratio is .85

Thus, Weighted Average Ciost of Capital is 17.7%

Weighted Average cost of Capital = (Weight of Equity*Cost of equity)+(Weight of Debt*After tax Cost of Debt) 11 = (1*Cost of equity)+(2.55*5(1-.3)) 11 = Cost of Equity+ 8.93                                                                                                 2.07 =

Cost of Equity

Thus, Cost of Equity is 2.07% Working: Weight of Equity and Debt: Debt-Equity Ratio = Debt/Equity 2.55 = Debt/Equity 2.55/1 = Debt/Equity Thus, Debt =                 2.55 Equity =                 1.00

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.