Crosby Industries has a debt-equity ratio of 1.2. Its WACC is 14 percent, and it
ID: 2753217 • Letter: C
Question
Crosby Industries has a debt-equity ratio of 1.2. Its WACC is 14 percent, and its cost of debt is 5 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: (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).) (b) 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).)
Explanation / Answer
Solution:
Requirement 1
Requirement 2 -a
b.
c.
Debt - Equity - 1.2 Weight Cost of Capital Weighted cost of capital Debt 12 54.55% 5% 2.73% Equity 10 45.45% x% 45.45x% 22 14% Accordingly, 2.73% + 45.45 x % = 14% x % 24.80%Related Questions
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