Ques 6 Crosby Industries has a debt-equity ratio of 1.5. Its WACC is 11 percent,
ID: 2758238 • Letter: Q
Question
Ques 6
Crosby Industries has a debt-equity ratio of 1.5. Its WACC is 11 percent, and its cost of debt is 8 percent. There is no corporate tax. 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).) 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).) 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).) 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).)Explanation / Answer
WACC = Wd×Rd+We×Ke
W is weights of respective portfolios
R is return on respective portfolios
Wd+We = 1
Ke = (WACC-Wd×Rd)÷We
a)
Ke = (1.5%-(2÷3)×8%)÷(1÷3)
= 1.28%
b)
Ke = (1.5%-(0.7÷1.7)×8%)÷(1÷1.7)
= 6.89%
c)
Ke = (1.5%-(0÷1)×8%)÷(1÷1)
= 1.5%