Question

Dickson, Inc., has a debt-equity ratio of 2.65. The firm’s weighted average cost of capital is 10 percent and its pretax cost of debt is 7 percent. The tax rate is 25 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.)
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.)
c.	What would the company’s weighted average cost of capital be if the company's debt-equity ratio were .45 and 1.65? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

a.

0.10 = (2.65/3.65)(0.07)(1 - 0.25) + (1/3.65)Ce

Ce = 22.59%

b.

Unlevered Cost of Equity = 0.2259/(1 + (1 - 0.25)2.65)

Unlevered Cost of Equity = 7.56%