Essentials of Corporate Finance
Essentials of Corporate Finance
8th Edition
ISBN: 9780078034756
Author: Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan
Publisher: MCGRAW-HILL HIGHER EDUCATION
Question
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Chapter 13, Problem 13.3C
Summary Introduction

To compute: The equity capital cost of the firm.

Introduction:

WACC (Weighted Average Cost of Capital) is the rate which a company is expected to pay on an average to all the security holders in order to finance its assets.

Expert Solution & Answer
Check Mark

Answer to Problem 13.3C

The cost of equity capital of the firm at the debt-equity ratio of 1.2 is 18.26%.

Explanation of Solution

Given information:

The debt-equity ratio of Company C is 1.2. The cost of debt is 5%, and WACC is 11%.

Note: Using the provided information, calculate WACC to find the equity cost. The debt-equity ratio of 1.2 implies that the weight of debt is 1/2.2, and the equity weight is 1.2/2.2.

Where V=(1+1.2) .

Formula of WACC to calculate the cost of equity:

WACC=(EV)RE+(DV)RD

Calculate the cost of equity:

WACC=(EV)RE+(DV)RD$0.11=(12.2)RE+(1.22.2)(0.05)$0.11=(12.2)RE+(1.22.2)(0.05)

$0.11=(12.2)RE+$0.027$0.083=(12.2)RERE=$0.18.26 or 18.26%

Hence, the cost of equity is 18.26%.

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Chapter 13 Solutions

Essentials of Corporate Finance

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