Crosby Industries has a debt-equity ratio of 1.2. Its WACC is 11 percent, and it

Question

Crosby Industries has a debt-equity ratio of 1.2. Its WACC is 11 percent, and its cost of debt is 5 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 18.2 % 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 0.7? (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

WACC= Debt % * cost of debt + Equity% * Cost of equity

Cost of Equity =

(WACC- Debt ratio*cost of debt)/Equity ratio

Now debt ratio = (Debt /Equity )/((1+ Debt/Equity))

Equity ratio = 1- Debt ratio

Hence results are as follows

(WACC- Debt ratio*cost of debt)/Equity ratio

Now debt ratio = (Debt /Equity )/((1+ Debt/Equity))

Equity ratio = 1- Debt ratio

Hence results are as follows

WACC Debt/ Equity Debt ratio Equity ratio cost of debt (WACC- Debt ratio*cost of debt)/Equity ratio 11% 1.2 54.55% 45.45% 5% 18.20% 11% 2 66.67% 33.33% 5% 23.00% 11% 0.7 41.18% 58.82% 5% 15.20% 11% 0 0.00% 100.00% 5% 11.00%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.