Acetate, Inc., has equity with a market value of $23 million and debt with a market value of $7 million. Treasury bills that mature in one year yield 5 percent per year, and the expected return on the market portfolio is 12 percent. The beta of Acetate’s equity is 1.15. 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?