Question 2

Acetate, Inc. has equity with a market value of $20 million and debt with a market value of $10 million. Treasury bills that mature in one year yield 8% per year, and the expected return on the market portfolio over the next year is 18%. The beta of Acetate's equity is .90. The firm pays no taxes.

Required:

(a) Calculate Acetate's debt to equity ratio.

(b) Calculate Acetate's weighted average cost of capital.

(c) Calculate the cost of capital for an otherwise identical all-equity firm.