BUSN 625: Managerial Finance

Chapter 14 Problems

14.12 Weston Industries

Debt Ratio 1.4
Equity Ratio 2.4
WACC 8.30%
Cost of Debt 5.40%
Tax Rate 24.00%

a) Weston's Cost of Equity 14.17%

Step 1 - Finding Debt Component of WACC 2.39%
Step 2 - Finding Equity Component of WACC 5.91%
Step 3 - Finding Cost of Equity Capital 14.17%

b) Weston's Unlevered Cost of Equity Capital 9.68%

Step 1 - 106.40%
Step 2 15.08%
Step 3 9.68%

c) Cost of Equity With Debt/Equity Ratio=2 16.19%

c) Cost of Equity With Debt/Equity Ratio=1 12.94%

c) Cost of Equity With Debt/Equity Ratio=0 9.68%

14.13 Shadow Corp

Current Debt Level 0.00%
Est. Borrowing Rate 5.75%
Tax Rate 22.00%
WACC 8.90%

a) Firm's Cost of Equity Capital 8.90%

b) Cost of Equity Capital@25% Debt Level 9.72%

c) Cost of Equity Capital@50% Debt Level 11.36%

d(a) WACC@25% Debt Level 8.41%

d(b) WACC@50% Debt Level 7.92%

14.21 - Jenkins Corp
Equity Market Value $ 6.40
Debt@Market Value $ 2.60
Total Debt&Equity $ 9.00
Cost of Debt 7.50%
Company's Beta 1.10
T-Bills Rate 4.00%
Market Return 11.00%

a) What is Jenkins Debt-Equity Ratio 0.4063

b) What is Jenkins WACC 10.49%

Step 1: Find the Cost of Equity 11.70%
Step2: Jenkins WACC 10.49%

c) What is Jenkins WACC@All Equity 11.70%