5. Acetate, Inc., has equity with a market value of $23.9 million and debt with

Question

5.

Acetate, Inc., has equity with a market value of $23.9 million and debt with a market value of $7.17 million. Treasury bills that mature in one year yield 5 percent per year, and the expected return on the market portfolio is 12 percent. The beta of the company’s equity is 1.24. The company pays no taxes.

What is the company’s weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What is the cost of capital for an otherwise identical all-equity company? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

5.

Acetate, Inc., has equity with a market value of $23.9 million and debt with a market value of $7.17 million. Treasury bills that mature in one year yield 5 percent per year, and the expected return on the market portfolio is 12 percent. The beta of the company’s equity is 1.24. The company pays no taxes.

Explanation / Answer

a. debt-equity = 7.17/23.9 = 0.30

cost of equity = 5% + 1.24*7% = 13.68%

b. WACC = (13.68% + 0.3*5%)/1.3 = 11.68%

c. unlevered beta = 1.24/(1 + 0.3) = 0.9538

cost of equity = 5% + 0.9538*7% = 11.68%

WACC = (11.68% + 0.3*5%)/1.3 = 10.14%

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