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    Acetate debt-equity ratio & weighted average cost of capital

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    Acetate, Inc., has equity with a market value of $20 million and debt with a market value of $10 million. Treasury bills that mature in one year yield 8% per year, and the expected return on the market portfolio over the nex year is 18%. The beta of Acetate's equity is .90. The firm pays no taxes.
    a. What is Acetate's debt-equity ratio?
    b. What is the firm's weighted average cost of capital?
    c. What is the cost of capital for an otherwise identical all-equity firm?

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    Solution Preview

    Debt Equity Ratio = Market value of Debt / Market Value of Equity =10/20 =0.5

    b) WACC = Cost of Equity*Weight of Equity + Cost of Debt * Weight of Debt
    Cost of Equity Ke= Rf + ...

    Solution Summary

    Walks through the concepts of weighted average cost of Capital for leveraged as well as unlevered firm by solving a problem in step by step manner.