# 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?

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#### 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.