16- Twice Shy Industries has a debtequity ratio of 1.8. Its WACC is 8.3 percent,
ID: 2784357 • Letter: 1
Question
16-
Twice Shy Industries has a debtequity ratio of 1.8. Its WACC is 8.3 percent, and its cost of debt is 6.3 percent. The corporate tax rate is 35 percent.
What is the company’s cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What would the cost of equity be if the debtequity ratio were 2? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What would the cost of equity be if the debtequity ratio were 1.0? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What would the cost of equity be if the debtequity ratio were zero? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Twice Shy Industries has a debtequity ratio of 1.8. Its WACC is 8.3 percent, and its cost of debt is 6.3 percent. The corporate tax rate is 35 percent.
Explanation / Answer
1. Debt to Equity ratio = 1.8:1
Total capital = 1.8 + 1 = 2.8
Weight of debt = 1.8/2.8 = 0.643
Weight of Equity = 1/2.8 = 0357
Cost of debt (after tax) = 6.3* (1 - 0.35) = 4.095%
Now,
0.357x + 0.026 = 0083
0.357x = 0.057
x = 0.057 / 0.357 = 0.15966
Cost of Equity = 15.97%
c-1, when debt to equity = 2
Total capital = 2 + 1 = 3
Weight of debt = 2/3 = 0.667
Weight of Equity = 1/3 = 0.333
0.333x + 0.027 = 0.083
16.17%
Similarly, when debt to equity ratio = 1
0.5x + 0.020 = 0.083 = 0.126 = 12.6%
c-3 when debt to equity ratio = 0
it means the debt is zero, whole of the WACC belongs to equity, hence cost of equity = 8.3%
Source Weight Specific Cost of capital Weight *Cost of Capital Equity 0.357 x =0.357 * x Debt 0.643 0.041 0.026 WACC 0.083Related Questions
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