Skillet Industries has a debt-equity ratio of 1.6. Its WACC is 8.6 percent, and

Question

Skillet Industries has a debt-equity ratio of 1.6. Its WACC is 8.6 percent, and its cost of debt is 6.1 percent. The corporate tax rate is 35 percent. a. What is the company?s cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity capital 108 % b. What is the company?s unlevered cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16)) Unlevered cost of equity capital 8.4 % c-1 What would the cost of equity be if the debt-equity ratio were 2? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity 11.40% c-2 What would the cost of equity be if the debt-equity ratio were 1.0? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity c-3 What would the cost of equity be if the debt-equity ratio were zero? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity 8.4%

Explanation / Answer

Answer A

Answer B

Answer c-1

Answer c-2

Answer c-3

Hope this helps.

Debt Equity 1.6 Debt capital =( d/e) /( 1+d/e) = 1.6 / (1+1.6) 62% Equity capital = (1- debt capital) 38% WACC 8.60% Cost of debt 6.10% Corporate tax rate 35% WACC = equity x cost of equity + debt x cost of debt (1-tax) 8.60 = .38 x cost of equity + ..62 x .061x(1-.35) 8.60 = .38 x cost of equity + .0244 Cost of equity = (8.60 - .0244)/ .38 16.02%

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