Crosby Industries has a debt-equity ratio of 1.3. Its WACC is 12 percent, and it

Question

Crosby Industries has a debt-equity ratio of 1.3. Its WACC is 12 percent, and its cost of debt is 6 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 0.4? (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).)

Explanation / Answer

WACC = (Cost of debt * Debt-equity ratio + Cost of equity) / (Debt-equity ratio + 1)

Requirement 1:

12% = (6% * 1.3 + Cost of equity) / (1.3 + 1)

=> Cost of equity = 19.8%

Requirement 2:

(a) 12% = (6% * 2 + Cost of equity) / (2 + 1)

=> Cost of equity = 24.0%

(b) 12% = (6% * 0.4 + Cost of equity) / (0.4 + 1)

=> Cost of equity = 14.4%

(c) 12% = (6% * 0 + Cost of equity) / (0 + 1)

=> Cost of equity = 12.0%

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