Twice Shy Industries has a debtequity ratio of 14 Its WACC i

Twice Shy Industries has a debt?equity ratio of 1.4. Its WACC is 9.4 percent, and its cost of debt is 6.7 percent. The corporate tax rate is 35 percent.

Twice Shy Industries has a debt?equity ratio of 1.4. Its WACC is 9.4 percent, and its cost of debt is 6.7 percent. The corporate tax rate is 35 percent.

Question 8 (of 10) 8.10.00 points Twice Shy Industries has a debt-equity ratio of 1.4. Its WACC is 9.4 percent, and its cost of debt is 6.7 percent. The corporate tax rate is 35 percent. a. What is the company\'s cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity capital 16.46 % b. What is the company\'s unlevered cost of equity capital? (Do not round intermediate calculations Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Unlevered cost of equity capital 11.81 % c-1 What would the cost of equity be if the debt-equity ratio were 2? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity 18.57 % c-2 What would the cost of equity be if the debt-equity ratio were 1.0 (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity c-3 What would the cost of equity be if the debt-equity ratio were zero? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity Hints References eBook &Resources;

Solution

a) WACC 9.40% Cost of Debt after Tax = 6.7% x (1-35%) 4.35% Debt Equity Ratio 1.4 D/E = 1.4 D = 1.4E D+ E = 1 1.4E + E = 1 Equity weight = 1/2.4 41.67% Debt weight = 1 - 41.67% 58.33% WACC = (E/V)RE + (D/V)RD(1 –TC) 9.40% = 41.67% X Re + 58.33% x 4.35% 16.46% b) Cost of Equity RE = RU + (RU –RD)(D/E)(1 –TC) 16.46% = RU + (RU - 6.7%)x 1.4 x (1-35%) 16.46% = RU + 0.91RU - 6.10% RU = 22.56%/1.91 11.81% Levered Cost of Equity Unlevered Cost of Equity c-1) c-1) WACC 9.40% Cost of Equity RE = RU + (RU –RD)(D/E)(1 –TC) Cost of Debt after Tax = 6.7% x (1-35%) 4.35% Cost of Equity RE = 11.81% + (11.81% –6.7%)(2)(1 –.35) 18.46% Debt Equity Ratio 2 D/E = 2 c-2) D = 2E Cost of Equity RE = RU + (RU –RD)(D/E)(1 –TC) D+ E = 1 Cost of Equity RE = 11.81% + (11.81% –6.7%)(1)(1 –.35) 15.14% 2E + E = 1 Equity weight = 1/3 33.33% c-3) Debt weight = 1 - 33.33% 66.67% Cost of Equity RE = RU + (RU –RD)(D/E)(1 –TC) WACC = (E/V)RE + (D/V)RD(1 –TC) Cost of Equity RE = 11.81% + (11.81% –6.7%)(0)(1 –.35) 11.81% 9.40% = 33.33% X Re + 66.67% x 4.35% 19.49% c-2) WACC 9.40% Cost of Debt after Tax = 6.7% x (1-35%) 4.35% Debt Equity Ratio 1 D/E = 1 D = 1E D+ E = 1 1E + E = 1 Equity weight = 1/2 50.00% Debt weight = 1 - 50% 50.00% WACC = (E/V)RE + (D/V)RD(1 –TC) 9.40% = 50% X Re + 50% x 4.35% 14.45% c-3) WACC 9.40% Cost of Debt after Tax = 6.7% x (1-35%) 4.35% Debt Equity Ratio 0 D/E = 0 D = 0E D+ E = 1 0E + E = 1 Equity weight = 1/1 100.00% Debt weight = 1 - 50% 0.00% WACC = (E/V)RE + (D/V)RD(1 –TC) 9.40% = 100% X Re + 0% x 4.35% 9.40%