Twice Shy Industries has a debtequity ratio of 1.1. Its WACC is 7 percent, and i

Question

Twice Shy Industries has a debtequity ratio of 1.1. Its WACC is 7 percent, and its cost of debt is 5.6 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 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 1.1. Its WACC is 7 percent, and its cost of debt is 5.6 percent. The corporate tax rate is 35 percent.

Explanation / Answer

WACC = r(E) × w(E) + r(D) × (1 – t) × w(D)

A) Debt to equity ratio = 1.1

7% = r(e) * 45% + 5.6%* (1-35%)*55%

7% = 45%re + 2.0%

45%re = 5.00%

re = 11.11%

B)

Unlevered cost of equity capital would be the scenario when company has no debt.

Thus cost of equity is 11.11%

and the cost of unlevered cpital would be same as cost of equity because in this case equity would be 100% of the capitla

C)

Debt equity ratio = 2:1 = 66.66% debt and 33% equity

7% = r(e) * 33.33% + 5.6%* (1-35%)*66.66%%

7% = 33.33%re + 2.43%

33.33%re = 4.57%

re = 13.72%

C-2

Debt equity ratio = 1:1 = 50% debt and 50% equity

7% = r(e) * 50% + 5.6%* (1-35%)*50%

7% = 50%re + 1.82%

50%re = 5.18%

re = 10.36%

C-3 debt to equity ratio 0

then the debt would be zero and the cost of equity would be 10.36%

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