Please Help!!!!! 12 .) WACC. Nodebt, Inc., isa firm with all-equity financing. I
ID: 2770833 • Letter: P
Question
Please Help!!!!! 12.) WACC. Nodebt, Inc., isa firm with all-equity financing. Its equity beta is .80. TheTreasury bill rate is 4 percent, and the market risk premium isexpected to be 10 percent. What is Nodebt's asset beta? What isNodebt's weighted-average cost of capital? The firm is exempt frompaying taxes. 20.) Leverage and CapitalCosts. A firm currently has a debt-equity ratio of 1/2.The debt, which is virtually riskless, pays an interest rate of 6percent. The expected rate of return on the equity is 12 percent.What would happen to the expected rate of return on equity if thefirm reduced its debt-equity ratio to 1/3? Assume the firm pays notaxes. Please Help!!!!! 12.) WACC. Nodebt, Inc., isa firm with all-equity financing. Its equity beta is .80. TheTreasury bill rate is 4 percent, and the market risk premium isexpected to be 10 percent. What is Nodebt's asset beta? What isNodebt's weighted-average cost of capital? The firm is exempt frompaying taxes. 20.) Leverage and CapitalCosts. A firm currently has a debt-equity ratio of 1/2.The debt, which is virtually riskless, pays an interest rate of 6percent. The expected rate of return on the equity is 12 percent.What would happen to the expected rate of return on equity if thefirm reduced its debt-equity ratio to 1/3? Assume the firm pays notaxes.Explanation / Answer
Equity Beta = 0.80
Treasury bill rate (Risk-freerate) = 4%(Rf)
Market Risk-Premium(MRP) = 10%
If the firm is an Equity based firm, then the Asset Beta of thefirm is 0.80
Asset Beta = 0.80
Calculating Cost of Equity (RE) = Rf + ß * (MRP)
RE = 0.04 + 0.80 * (0.10)
RE = 0.12
Weighted Average Cost of Capital (WACC) = RE * [E/(D/E)] + RD *[D/(D+E)]
WACC = RE * [E/(E)]
WACC = 0.12 * 1
Debt Equity ratio = ½ (or) 0.50(50%)
Risk-free Interest rate = 6%
Expected rate of return on the equity = 12%
If the firm reduced its debt-equity ratio to 1/3(0.33)
Expected rate of return on the equity = 0.06 /0.33