Acetate, Inc., has equity with a market value of $23.6 million and debt with a m
ID: 2761471 • Letter: A
Question
Acetate, Inc., has equity with a market value of $23.6 million and debt with a market value of $7.08 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 1.21. 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?
Acetate, Inc., has equity with a market value of $23.6 million and debt with a market value of $7.08 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 1.21. The company pays no taxes.
Explanation / Answer
Debt/ Equity ratio=7.08/23.6
D/E ratio = 0.3 or 30%
WACC= Weight of debt* after tax cost of debt+ weight of equity*cost of equity
Cost of equity using CAPM model= 5%+1.21*12%=19.52%
Weight of debt=7.08/(7.08+23.6)=23.08%
Weight of equity= 76.92%
Cost of debt is not given??
WACC can not be calculated.
WACC for all equity company is just cost of equity capital
Beta unlevered= Beta levered/((1+(1-tax)*D/E))
Here company pays no tax so tax rate=0%
Beta unlevered=1.21/((1+(1-0%)*0.3))=0.93
cost of equity capital= 5%+ 0.93*12%=16.16%
Thus Cost of Capital for all equity company would be 16.16%