Acetate, Inc., has equity with a market value of $23.1 million and debt with a m
ID: 2723335 • Letter: A
Question
Acetate, Inc., has equity with a market value of $23.1 million and debt with a market value of $9.24 million. The cost of debt is 10% per year. Treasury bills that mature in one year yield 6 percent per year, and the expected return on the market portfolio is 11 percent. The beta of Acetate's equity is 1.16. The firm pays no taxes.
A)What is Acetate's debt-equity ratio? Do not round intermediate calcuatlions and round to 2 decimal places final answer
B) What is the firm's weighted average cost of capital? Do not round intermediate calcuatlions and round to 2 decimal places final answer
C) What is the cost of capital for an otherwise identical all-equity firm? Round your answer to 2 decimal places.
Explanation / Answer
Acetate Inc. All Amounts in $ A) Debt-Equity Ratio Particulars Amount $ % of total million Debt 9.24 28.57% Equity 23.1 71.43% 32.34 Debt-Equity Ratio = Debt / Equity = 28.57% / 71.43% = 40.0% B) Weighted Average Cost of Capital Particulars Amount $ % cost Weighted million Amount Debt 9.24 10% 0.924 Equity 23.1 5.80% 1.34 Total 32.34 2.264 Weighted Average Cost of Capital = 7.00% C) For an all-identical equity firm, the cost of capital will be 5.80% of $ 32.34 million = = $ 1.876 million