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Calculating levered and unlevered cost of equity

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Weston Industries has a debt-equity ratio of 1.1. Its WACC is 8.2 percent, and its cost of debt is 6.4 percent. The corporate tax rate is 35 percent.

a.
What is Weston's cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Cost of equity capital %

b.
What is Weston's unlevered cost of equity capital? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Unlevered cost of equity capital %

c-1
What would the cost of equity be if the debt-equity ratio were 2? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Cost of equity %

c-2
What would the cost of equity be if the debt-equity ratio were 1? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Cost of equity %

c-3
What would the cost of equity be if the debt-equity ratio were zero? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Cost of equity %

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Solution Summary

The solution depicts the steps to estimate the levered and unlevered cost of capital.

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a)
We are given that
Debt to Equity Ratio=D/E=1.1
WACC=8.2%
Cost of debt=Rd=6.4%
Weight of equity=We=1/(1+D/E)=1/(1+1.1)= 0.47619
Weight of debt=Wd=1-We=1-0.47619= 0.52381

WACC=We*Re+Wd*Rd*(1-T)
Plug in the value of ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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