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    Capital Structure

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    Acetate Inc. Problem 15.2

    Acetate's Value: $30,000,000.00
    Equity: $20,000,000.00
    Debt: $10,000,000.00
    Cost of Debt: 14.00%
    T-Bills: 8.00% yield
    Expected Return on Portfolio: 18.00%
    Beta: 0.9

    A- What is Acetate's Debt-Equity Ratio?

    B - What is the firm's WACC? 16.67%
    WACC Formula = B/B+S*rb + S/B+S*rs
    Where:
    B= Market Value of Debt
    S = Market value of Equity
    rb = Cost of Debt
    rs = expected return on portfolio

    C- What is the cost of capital for an otherwise identical all-equity firm?

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    https://brainmass.com/business/weighted-average-cost-of-capital/capital-structure-42882

    Solution Preview

    A- What is Acetate's Debt-Equity Ratio?

    Market value of debt= $10,000,000

    Market value of equity= $20,000,000

    Total Mkt value= $30,000,000

    Debt Equity ratio= 0.5 =10000000/20000000

    B - What is the firm's WACC?

    CAPM (Capital Asset Pricing Model equation ...

    Solution Summary

    The solution calculates Debt-Equity Ratio, weighted average cost of capital (by first calculating cost of equity using CAPM), and cost of capital for an otherwise identical all-equity firm.

    $2.19