Crosby Industries has a debt-equity ratio of 1.3. Its WACC is 8 percent, and its

Question

Crosby Industries has a debt-equity ratio of 1.3. Its WACC is 8 percent, and its cost of debt is 5 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 0.6? (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 1.3. Its WACC is 8 percent, and its cost of debt is 5 percent. There is no corporate tax.

Explanation / Answer

WACC = Wd×Rd+We×Ke

W is weights of respective portfolios

R is return on respective portfolios

Wd+We = 1

Cost of equity, Ke = (WACC-Wd×Rd)÷We

a)

Ke = (8%-(1.3÷2.3)×5%)÷(1÷2.3)

= 11.9%

b)

Ke = (8%-(2÷3)×5%)÷(1÷3)

= 14%

c)

Ke = (8%-(0÷1)×5%)÷1

= 8%

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