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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?
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?

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Solution Summary

The solution determines the debt equity ratio and calculates WACC.

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WACC = Re/V *cost of equity + Rd/V* cost of debt ( V = Re + Rd)

a) Given : Rd/Re = ...

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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