Crosby Industries has a debt-equity ratio of 1.6. Its WACC is 10 percent, and it

Question

Crosby Industries has a debt-equity ratio of 1.6. Its WACC is 10 percent, and its cost of debt is 7 percent. There is no corporate tax.

Requirement 1: 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).)

Cost of equity %

Requirement 2: (a) 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).)

Cost of equity %

(b) 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).)

Cost of equity %

(c) 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).)

Cost of equity %

Explanation / Answer

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

Requirement 1:

Cost of equity = (1 + 1.6) * 10% - 1.6 * 7%

= 14.80%

Requirement 2:

(a) Cost of equity = (1 + 2) * 10% - 2 * 7%

= 16.00%

(b) Cost of equity = (1 + 0.4) * 10% - 0.4 * 7%

= 11.20%

(c) Cost of equity = (1 + 0) * 10% - 0 * 7%

= 10.00%

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