Twice Shy Industries has a debtequity ratio of 1.3. Its WACC is 8.6 percent, and

Question

Twice Shy Industries has a debtequity ratio of 1.3. Its WACC is 8.6 percent, and its cost of debt is 7.4 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 1.3. Its WACC is 8.6 percent, and its cost of debt is 7.4 percent. The corporate tax rate is 35 percent.

Explanation / Answer

1) D/E = 1.3/1

D/A = D/(E+D) = 1.3/(1+1.3) = 0.5652

E/A = 1-D/A = 0.4347

WACC = wd(rd)(1 – T) + wc(rs)

8.6 = 7.4*.5652*(1-0.35) + 0.4347*cost of levered equity

Cost of levered equity = 13.53%

2) Cost of levered equity = Cost of unlevered equity + (Cost of unlevered equity-cost of debt*Debt/equity*(1-tax rate)

13.53 = Cost of unlevered equity + (Cost of unlevered equity-7.4)*1.3*(1-0.35)

Cost of unlevered equity = 10.72%

3) Cost of levered equity = Cost of unlevered equity + (Cost of unlevered equity-cost of debt*Debt/equity*(1-tax rate)

Cost of levered equity = 10.72+(10.72-7.4)*2*(1-0.65)

= 13.04%

4)

Cost of levered equity = Cost of unlevered equity + (Cost of unlevered equity-cost of debt*Debt/equity*(1-tax rate)

Cost of levered equity = 10.72+(10.72-7.4)*1*(1-0.65)

= 11.88%

5)

Cost of levered equity = Cost of unlevered equity + (Cost of unlevered equity-cost of debt*Debt/equity*(1-tax rate)

Cost of levered equity = 10.72+(10.72-7.4)*0*(1-0.65)

= 10.72%

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