Skillet Industries has a debt?equity ratio of 1.7. Its WACC is 9.2 percent, and its cost of debt is 6.2 percent. The corporate tax rate is 35 percent. a. What is the company?s cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity capital % b. What is the company?s unlevered cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16)) Unlevered cost of equity capital % c-1 What would the cost of equity be if the debt?equity ratio were 2? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % c-2 What would the cost of equity be if the debt?equity ratio were 1.0? (Round your answer 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? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity %
Skillet Industries has a debt-equity ratio of 1.7. Its WACC is 9.2 percent, and its cost of debt is 6.2 percent. The corporate tax rate is 35 percent. a. What is the company's cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity capital % b. What is the company's unlevered cost of equity capital? (Round your answer to 2 decimal places. (e.g., 32.16)) Unlevered cost of equity capital % c-1 What would the cost of equity be if the debt-equity ratio were 2? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % c-2 What would the cost of equity be if the debt-equity ratio were 1.0? (Round your answer 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? (Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity % Skillet Industries has a debt-equity ratio of 1.7. Its WACC is 9.2 percent, and its cost of debt is 6.2 percent. The corporate tax rate is 35 percent. a. What is the company's cost of equity capital? 17.99% b. What is the company's unlevered cost of equity capital? _____% c-1 What would the cost of equity be if the debt-equity ratio were 2? _____% c-2 What would the cost of equity be if the debt-equity ratio were 1.0? _____% c-3 What would the cost of equity be if the debt-equity ratio were zero? _____% Hint given: Debt-equity ratio _1.7_ _9.2% Cost of debt _6.2% _35%_ WACC = WE X RE + WD X RD X (1 - T) 9.20% = _40% X RE + _60% X _6.2% X (_0.65_) Cost of equity 17.99% Cost of equity (RE) MM Proposition II RE = RU + (RU - RD ) X D/E X (1 - TC) D/E = 1.5 17.99% = RU + (RU - 6.2% ) X _1.7 _ X (_0.65_) Unlevered cost of equity _____ 0.17.99 = RU + ._____ (RU) - ______ .25 = _____ (RU) (RU) = _____ or ______% What would the cost of equity be if the debt-equity ratio were 2? _____% What would the cost of equity be if the debt-equity ratio were 1.0? _____% What would the cost of equity be if the debt-equity ratio were zero? _____% MM Proposition II D/E = 2 D/E = 1 D/E = 0 RE = RU + ( RU - _____% = _____% + (_____% _____% = _____% + (_____% _____% = _____% + (_____% RD ) X D/E X (1 - TC) -_6.2%__) X _2.00 X (_0.65) -_6.2%__) X _1.00 X (_0.65) -_6.2%__) X _0.00 X (_0.65) Example: Maxwell Industries has a debt-equity ratio of 1.5. Its WACC is 10 percent, and its cost of debt is 7 percent. The corporate tax rate is 35 percent. What is the company's cost of equity capital? 18.18% What is the company's unlevered cost of equity capital? 12.66% Debt-equity ratio _1.5__ _10%_ Cost of debt __7%_ _35%_ (1-35%) WACC = WE X RE + WD X RD X (1 - T) 10.00% = _40% X RE + _60%_ X _7.0% X (_0.65_) .10 = (.4) RE + 0.0273 RE = 0.0727 / 4 = .1818 Cost of equity _18.18%_ WE = E / (D + E) WE = 1 / (1.5 + 1) = .40 WD = D / (D + E) WD = 1.5 / (1.5 + 1) = .60 Cost of equity (RE) (1-35%) MM Proposition II RE = RU + (RU - RD ) X D/E X (1 - TC) D/E = 1.5 18.18% = RU + (RU -_7%__) X _1.50 X (_0.65) Unlevered cost of equity _12.66%_ 0.1818 = RU + .975(RU) - 0.06825 .25 = 1.975 (RU) (RU) = .1266 or 12.66% What would the cost of equity be if the debt-equity ratio were 2? 20.02% What would the cost of equity be if the debt-equity ratio were 1.0? 16.34% What would the cost of equity be if the debt-equity ratio were zero? 12.66% MM Proposition II D/E = 2 D/E = 1 D/E = 0 RE = RU + ( RU - RD ) X D/E X (1 - TC) 20.02% = 12.66% + (12.66% -_7%__) X _2.00 X (_0.65) 16.34% = 12.66% + (12.66% -_7%__) X _1.00 X (_0.65) 12.66% = 12.66% + (12.66% -_7%__) X _0.00 X (_0.65)
