- Financial Accounting & Bookkeeping
- Financial Ratios
Debt-equity ratio and calculating WACC
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A company has a debt-equity ratio of 1.5. Its WACC is 14%, and its cost of debt is 9%. There is no corporate tax.
A. What is the company's cost of equity capital?
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B. What would the cost of equity be if the debt-equity ratio were 1.0? What if it were 0.5? What is it were 0?
WACC = Re/V *cost of equity + Rd/V* cost of debt ( V = Re + Rd)
a) Given : Rd/Re = ...
The solution determines the debt equity ratio and calculates WACC.