Acetate Inc, has common stock with a market value of $20 million and debt with a market value of $10 million. The cost of the debt is 14 percent. The current treasury-bill rate is 8 percent, and the expected market premium is 10 percent. The beta on Acetate equity is 0.9.
a. What is Acetate debt-equity ratio?
b. What is the firm's overall required return?
equity = 20 million
debt = 10 million
Then debt-equity ratio = 10 / 20 = 0.5
You will find the answer to this puzzling question inside...