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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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.
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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 ...
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