Acetate, Inc., has equity with a market value of $22 million and debt with a mar

Question

Acetate, Inc., has equity with a market value of $22 million and debt with a market value of $11 million. Treasury bills that mature in one year yield 4 present per year, and the expected return on the market portfolio is 10 present. The beta of the company's equity is 1.05. The company pays no taxes. What is the company's debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a present rounded to 2 decimal places, e.g., 32.16.) Weighted average cost of capital What is the cost of capital for an otherwise identical all-equity company? (Do not round intermediate calculations and enter your answer as a present rounded to 2 decimal places, e.g., 32.16.) Cost of capital

Explanation / Answer

c. FOR ALL EQUITYFIRM IT WILL BE :

BY USING CAPM MODEL:

KE = RF + BETA (RM - RF)

= 4 % +1.05 (10-4%)

= 10.30%

as it is all equity financed means no debt that equity shall be overall capital hence cost of capital = 10.30%

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