Crosby Industries has a debt-equity ratio of 1.1. Its WACC is 13 percent, and it

Question

Crosby Industries has a debt-equity ratio of 1.1. Its WACC is 13 percent, and its cost of debt is 4 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 0.5? (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

Debt Equity 1.1 WACC 13% Cost of debt 4% Requirement 1 Let the equity =1 Debt =1.1 Total capital = 2.1 Cost of equity = x WACC = Kd* Weight of debt/Total Capital + ke * Weight of equity/ Total Capital WACC = 4 * (1.1/2.1) + x * (1/2.1) x= 22.9 % Requirement 2 a. Debt equity =2 WACC = Kd* Weight of debt/Total Capital + ke * Weight of equity/ Total Capital Changing the values in the above to 2 x= 31% b. Debt equity = 0.5 Changing the values in the above to 0.5 x= 17.5 c. Debt equity = 0 Changing the values in the above to 0 x= 13%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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