Question

Williamson, Inc., has a debt–equity ratio of 2.54. The company's weighted average cost of capital is 9 percent, and its pretax cost of debt is 7 percent. The corporate tax rate is 40 percent.

  

a.	What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Cost of equity capital

%

  

b.	What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Unlevered cost of equity

%

  

c.	What would the company’s weighted average cost of capital be if the company's debt–equity ratio were .80 and 1.70? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  

	Weighted average cost of capital
Debt–equity ratio = .80	%
Debt–equity ratio = 1.70	%

Answer 1

Solution ) (as Debt- Equity Ratio = 2.54 so, from debt- equity ratio, we will calculate weight of debt and weight of equity in capital structure. Dest Equity Ratio = 2.54 So, is for value of 2.54 equity = 1, the value of Debt so, Total value - 2.54+1 = 3.54 weight of Debt - Value of debt Total value = 2.54 3.54 30.7175141 Or 71.75 4. (ab prox) weight of Equity = value of Equity - Total value 0.282485 09 28.25.). 3.54 (approx)

Pre tax cost of debt fra) = 7% - Tax Rate = 40% or 0.4 wAcc [weighted Average cost of capital 7-9% The formula for wace is WACC = Wa[rd (1-t)] + were Here Wl = weight of debt We = weight of equity Md = Poetax cost of debt me = cost of equity t= tax Putting value in the formula - 9.1%. = 71.750[77. (1-04)] + 28-2572(82) 9.4. = 0.7175 [ 4.2 7.3 + 0.2885( 4e) 94. = 3.0135%. + 0.2825(Me) 9% – 3.0/35% - 0.2825 (re) 5.9865% = 0.2835 (re) 5.9865 95 = re 100 X 0.2825

0.211915 - Me 21.19% (apboox) = re. 6) Unlevered cost of equity = It can be determined with MM proposition II with taxes . re? Hv+(914-1d) (1-t) Putting values 21.194. - ru 7 (4474-) (-0.4) 2.54 21.1907. - rut ( 44-71.)(0.6) (2.54) 21.194. = Mut (44-740)(1.524) 21.19%= ru t 1.524 (ru) - 10.668% 21.19%.+10.668% = 2.524 Mue 31.858= 2.524 (rus

12.622 028 %= ru 19.624. Cabb xox) = ou (c) calculate ware it ☺ Debt- Equity Ratio = 0.80 Total value = = 0.80 tl 1.80 weight of Debt = value of Debt Total value * 0.80 1,80 ~ 0.4 yuy Or 44.4407 weight of equity = value of Equity Total value Elke = 0.55555 & 55.56 %. WACC = Wolf Hd (1-t37+ were = 44.44.90 [74.61-0.4)3 + 55.564. (21909)

= 0.4444 [ 4.2 4.] 7 11.7731647 = 1.866V8%+ 11.773764). 13.639644% on 13.64% Capbrox) W If debt equity ratio is 1.70 Weight of Debt = Value of Debt Total value = 1.70 171.70 = 1,70 z 0.62962 og 62.96% 2.70 Capbroxy weight of equity = Value of Equity Total value dito = 037034 or 37.047. Cap boox) WALL = W4 (014 (1-4)]+ We te = 62.967.74(1-0,4)] + 37.04 1. (al-1996) 5 0.6296( 40240) + 7.848 776 %. = 2.64432 %. + 7.8487764 z 10.4930964. do 10.494. Cap brox)