Crosby Industries has a debt-equity ratio of 0.9. Its WACC is 7 percent, and its

Question

Crosby Industries has a debt-equity ratio of 0.9. Its WACC is 7 percent, and its cost of debt is 4 percent. There is no corporate tax.

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).)

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 0.7? (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).)

Crosby Industries has a debt-equity ratio of 0.9. Its WACC is 7 percent, and its cost of debt is 4 percent. There is no corporate tax.

Explanation / Answer

Given : WACC = 7% Cost Of Debt =   4% Assume cost of Equity =k WACC = D/(D+E)*4% +E/(D+E)*k Req 1. When D/E =0.90/1 WACC = 0.9/1.9*0.04+ 1/1.9*k =0.07 k =9.7% Cost Of Equity =9.7% Req 2. When D/E =2/1 WACC = 2/3*0.04+ 1/3*k =0.07 k =13% Cost Of Equity =13% Req 3. When D/E =0.7/1 WACC = 0.7/1.7*0.04+ 1/1.7*k =0.07 k =9.1% Cost Of Equity =9.1% Req 4. When D/E =0/1 Cost Of Equity =7% As there is no debt , WACC =cost of equity

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