Twice shy industries has a debt-equity ratio of 1.5. its WACC is 9.2 percent, an

Question

Twice shy industries has a debt-equity ratio of 1.5. its WACC is 9.2 percent, and its cost of debt is 6 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 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 2 decimal places, e.g., 32.16.) What would the cost of equality be if the debt-equity ratio were 2? (do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.) What would the cost of equality be if the debt-equity ratio were 1.0? (do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.) What would the cost of equality be if the debt-equity ratio were zero? (do not round intermediate calculations. Enter your answer as a percent rounded 2 decimal places, e.g., 32.16.)

Explanation / Answer

Let E = % of financing that is equity

D = % of financing that is debt

T = Tax Rate = 0.35

Let CE and CD be the Costs of Equity and Debt respectively.

Considering that there is a tax break on the interest paid on Debt,

WACC = E*CE + D*CD*(1-T)

WACC = 9.2%

CD = 6%

Note that E+D = 1

D/ E = 1.5

Thus, D= 1.5 E.

E = 1/(2.5) = 0.4; D = 0.6

Thus, 9.2 = 0.4*(CE) + 0.6*6*0.65

Thus, CE = 17.15%

The Cost of Equity is 17.15%

Let CU be the unlevered Cost of Equity.

Thus, WACC = CU (1-((D/(D+E))T))

9.2 = CU * (1-0.4*0.35)

Thus, CU = 10.70

The unlevered cost of equity is 10.70%

D/ E = 2

Thus, D = 2E

E = 0.333, D= 0.667

Thus, 9.2 = 0.333*(CE) + 0.667*6*0.65

Thus, CE is 19.82

The Cost of Equity is 19.82%

D/ E = 1

Thus, D= E = 0.5

9.2 = 0.5 (CE) + 0.5*6*0.65

Thus, CE = 14.5

Cost of Equity = 14.5%

D/E = 0

Thus, E=1

CE = WACC = 9.2

Thus, Cost of Equity is 9.2%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.