Cannot figure out C1-C3 Weston Industries has a debt-equity ratio of 1.6. Its WA

Question

Cannot figure out C1-C3

Weston Industries has a debt-equity ratio of 1.6. Its WACC is 8.6 percent, and its pretax cost of debt is 6.1 percent. The corporate tax rate is 35 percent. What is the company's cost of equity capital What is the company's unlevered cost of equity capital What would the cost of equity be if the debt-equity ratio were 27 What would the cost of equity be if the debt-equity ratio were 1.07.What would the cost of equity be if the debt-equity ratio were 1.0 3.What would the cost of equity be if the debt-equity ratio were zero

Explanation / Answer

Answer:c-1 With the D/E = 2

ke= kul+ [kul-kD] [D/E] [1–t]

ke= kul+ [kul-.0.061][D/E] [1–.35]

ke= .1096 + [.1096-.061] [2.0] [1–.35] = .17278 or 17.27%

Answer:c-2 With the D/E = 1

ke= kul+ [kul-kD] [D/E] [1–t]

ke= kul+ [kul-.0.061][D/E] [1–.35]

ke= .1096 + [.1096-.061] [1.0] [1–.35] = .14119 or 14.12%

Answer:c-3

If the D/E = 0 then ke= kul= 10.96%

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