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Capital Structure

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?

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