6. XYZ, Inc., has a debt-to-equity ratio of 2.5. The firm's weighted average cost of capital...

 

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6. XYZ, Inc., has a debt-to-equity ratio of 2.5. The firm's weighted average cost of capital (acc) is 15%, and its pre-tax cost of debt is 10%. XYZ is subject to a corporate tax rate of 35%. (a) What is XYZ's cost of equity capital (TE)? (b) What is XYZ's unlevered cost of equity capital (A)? (c) What would XYZ's weighted average cost of capital (acc) be if the firm's debt-to-equity ratio were 0.75? What if it were 1.5? 6. XYZ, Inc., has a debt-to-equity ratio of 2.5. The firm's weighted average cost of capital (acc) is 15%, and its pre-tax cost of debt is 10%. XYZ is subject to a corporate tax rate of 35%. (a) What is XYZ's cost of equity capital (TE)? (b) What is XYZ's unlevered cost of equity capital (A)? (c) What would XYZ's weighted average cost of capital (acc) be if the firm's debt-to-equity ratio were 0.75? What if it were 1.5?

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