Williamson Inc has a debtequity ratio of 244 The firms weigh

Williamson, Inc., has a debt-equity ratio of 2.44. The firm\'s weighted average cost of capital is 9 percent, and its pretax cost of debt is 7 percent. Williamson is subject to a corporate tax rate of 40 percent a. What is Williamson\'s cost of equity capital? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Cost of equity capital b. What is Williamson\'s unlevered cost of equity capital? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Unlevered cost of equity c. What would Williamson\'s weighted average cost of capital be if the firm\'s debt-equity ratio were .60 and 1.75? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16) Weighted average cost of capital Debt-equity ratio .60 Debt-equity ratio 1.75

Solution

Solution:

Cost of equity :

  

  = WACC - (Cost of debt x Weight of debt) / Weight of equity

  

   Cost of debt = Interest rate x (1-tax)

             = 7% x (1-0.40)

             = 4.2% …………(1)

Weight of Debt = 2.44 / (2.44 + 1)   

             = 0.7093……………(2)

Weight of equity = 1 - weight of debt

              = 1- 0.7093

              = 0.2907…………….(3)

Substituting the values 1 , 2 and 3 in the above formula

  = WACC - (Cost of debt x Weight of debt) / Weight of equity

  = 9- (4.2% x 0.7093) / 0.2907

  = 9 - 0.0297906 / 0.2907

  = 30.85

3 a) WACC = Cost of Debt x Weight of Debt + Cost of Equity x Weight of Equity 9 = 4.2 x 0.7093 + Cost of equity x 0.2907

     Cost of equity = (9- 2.9791) / 0.2907

                 = 20.71%

3 b) WACC = Cost of Debt x Weight of Debt + Cost of Equity x Weight of Equity 9 = Cost of Debt x 0.7093 + 0.2071 x 0.2907

    9 = Cost of Debt x 0.7093 + 0.0602

Cost of Debt = (9 - 0.0602) / 0.7093

           = 12.60%