Weston Industries has a debt–equity ratio of 1.1. Its WACC is 8.2 percent, and i

Question

Weston Industries has a debt–equity ratio of 1.1. Its WACC is 8.2 percent, and its cost of debt is 6.4 percent. The corporate tax rate is 35 percent

What is Weston’s cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

What is Weston’s unlevered cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent 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. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

What would the cost of equity be if the debt-equity ratio were 1? (Do not round intermediate calculations. Enter your answer as a percent 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. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

  Cost of equity

PLEASE HELP ME, 7 PEOPLE HAVE ANSWERED WRONG.

What is Weston’s cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

a) Answer: Cost of Equity Capital is 12.64%

If debt equity ratio is 1.1, it means that debt is 1.1/2.1 (52.38%) and equity is 1/2.1 (47.62%)

WACC is the weighted average of the cost of debt and cost of equity

WACC = Kd(D/D+E) + Ke(E/D+E)

Substituting values we have

8.2 = 6.4(1-0.35)*0.5238 + Ke*0.4762; 8.2 = 2.179 + Ke*0.4762; (8.2 - 2.179)/0.4762 =Ke

Therefore, Ke = 12.64%

b) Answer: The Unlevered cost of Equity Capital is 10.04%

As per MM proposition II with taxes

Ke(L) = Ke(U) + (Ke(U) - Kd) (D(1-t)/E)

Substituting values we have, 12.64 = Ke(U) + (Ke(U) - 6.4) (1.1(1-0.35)/1); 12.64 = Ke(U) + (Ke(U) - 6.4) * 0.715;

12.64 = Ke(U) + 0.715 Ke(U) - 4.576; 17.216/1.715 = Ke(U)

Ke(U) = 10.04%

c.1) Answer: Cost of Equity, if Debt/Equity ratio is 2 = 16.29%

WACC = Kd(D/D+E) + Ke(E/D+E)

Substituting values we have

8.2 = 6.4(1-0.35)*0.667 + Ke*0.333; 8.2 = 2.775 + Ke*0.333; (8.2 - 2.775)/0.333 =Ke

Therefore, Ke = 16.29%

c.2) Answer: Cost of equity, if Debt/Equity ratio is 1 = 12.24%

8.2 = 6.4(1-0.35)*0.5 + Ke*0.5; 8.2 = 2.08 + Ke*0.5; (8.2 - 2.08)/0.5 =Ke

Therefore, Ke = 12.24%

c.3) Answer: Cost of equity, if Debt/Equity ratio is 01 = 8.2%

8.2 = 6.4(1-0.35)*0 + Ke*1; 8.2 = Ke*1

Therefore, Ke = 8.2%

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