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    Acetate, Inc.

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    15. 2 Acetate, Inc. , has equity with a market value of $20 million and debt with a market value of $10 million. The cost of the debt is 14 percent per annum. Treasury bills that mature in one year yield 8 percent per annum, and the expected return on the market portfolio over the next year is 18 percent. The beta of Acetate's equity is 0. 9. The firm pays no taxes.
    a. What is Acetate's debt-equity ratio?
    b. What is the firm's weighted average cost of capital?
    c. What is the cost of capital for an otherwise identical all-equity firm?

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    Solution Preview

    15. 2 Acetate, Inc. , has equity with a market value of $20 million and debt with a market value of $10 million. The cost of the debt is 14 percent per annum. Treasury bills that mature in one year yield 8 percent per annum, and the expected return on the market portfolio over the next year is 18 percent. The beta of ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer what is Acetate's debt-equity ratio, what is the firm's weighted average cost of capital, and what is the cost of capital for an otherwise identical all-equity firm.

    $2.19