Thanks in advance! Problem 13-10 Calculating WACC [LO 1] Crosby Industries has a
ID: 2761831 • Letter: T
Question
Thanks in advance!
Problem 13-10 Calculating WACC [LO 1] Crosby Industries has a debt-equity ratio of 1.3. Its WACC is 15 percent, and its cost of debt is 8 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).) Cost of equity % 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).) Cost of equity % (b) What would the cost of equity be if the debt-equity ratio were 0.7? (Do not round intermediate calculations. Input your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost of equity % (c) 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).) Cost of equity %
Explanation / Answer
1./
WACC = COST OF EQUITY + COST OF DEBT
15% = COST OF EQUITY + (8% * 13/23)
COST OF EQUITY = 15% - 4.52%
= 10.48%
2./
A./
WACC = COST OF EQUITY + COST OF DEBT
15% = COST OF EQUITY + (8% * 2/3)
COST OF EQUITY = 15% - 5.33%
= 9.67%
B./
WACC = COST OF EQUITY + COST OF DEBT
15% = COST OF EQUITY + (8% * 7/17)
COST OF EQUITY = 15% - 3.29%
= 11.71%
C./
WACC = COST OF EQUITY + COST OF DEBT
15% = COST OF EQUITY + (8% * 0)
COST OF EQUITY = 15% - 0%
= 15%
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