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.
1. What is Acetate's debt-equity ratio?
2. What is the firm's weighted average cost of capital?
3. What is the cost of capital for an otherwise identical all-equity firm?
Q- Acetate debt-equity ratio?
=Market value of Debt/Market value of equity
Q What is the firm's overall required return?
It is weighted average cost of capital, that is weighted average of cost of equity and cost of debt.
1. Cost of equity
Ke = ...
The solution examines debt and equity, weighted average capital cost and the cost of capital for Acetate Inc.