Acetate, Inc., has equity with a market value of $22.8 million and debt with a m
ID: 2804633 • Letter: A
Question
Acetate, Inc., has equity with a market value of $22.8 million and debt with a market value of $6.84 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 1.13. The company pays no taxes.
What is the company's debt–equity ratio?
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.)
Acetate, Inc., has equity with a market value of $22.8 million and debt with a market value of $6.84 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 1.13. The company pays no taxes.
Explanation / Answer
Assuming Cost of Debt is 0 (since not given) If given appropriate rate would be considered
Calculation of Proportion
Total Capital=22800000+6840000=29640000
Debt %=6840000/29640000*100=76.92%
Equity%=22800000/29640000*100=23.08%
Since all equity company no debt is involved
Acetate Inc. Market Value of Equity 22800000 Market Value of Debt 6840000 Yield rate of T bills(Rf) 5% Expected return on market portfolio(Rm) 12% Beta 1.13 Cost of Equity(Ke) Rf+(Rm-Rf) 5%+1.13(12%-5%) 0.1291 12.91%