Question $2$

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 next year is $18\%.$ The beta of Acetate's equity is $\mathrm{.}90.$ The firm

pays no taxes.

Required:

$($a$)$ Calculate Acetate's debt to equity ratio. $(5$ marks$)$

$($b$)$ Calculate Acetate's weighted average cost of capital. $(15$ marks$)$

$($c$)$ Calculate the cost of capital for an otherwise identical all$-$equity firm. $(10$ marks$)$

Total $30$ marks