MySelf,Inc., has equity with a market value of $20 million and debt
with a market value of $10 million. The cost of the debt is 14 percent
per annum.Treasury bills that mature in one year yield 8 percent per
annum, and the expected return on the market portfolio over the next
year is 18 percent.The beta of MySelf?s equity is 0.9.The firm pays no
taxes.
a. What is MySelf?s debt-equity ratio?
b. What is the firm?s weighted average cost of capital?

A nice tutorial, along with a spreadsheet that can be downloaded for
this purpose, can be found at "Online Tutorial #8: How Do You
Calculate A Company's Cost of Capital?" Expectations Investing
http://www.expectationsinvesting.com/tutorial8.shtml.  The spreadsheet
is available here: http://www.expectationsinvesting.com/spreadsheets/WACC.xls.

The debt of the firm (D) is valued at $10 million and the equity of
the firm (E) is valued at $20 million, giving an enterprise value (V)
of $30 million.

The debt-equity ratio is simply D/E or 0.5.

WACC = E/V*Re + D/V*Rd*(1-Tc).  Because the firm pays no taxes, the
corporate tax rate Tc is 0.  Rd is simply the debt cost or 14%.

Re, or the return on equity, is calculated using the formula Rf +
Beta(Rm-Rf).  (Rm - Rf) is the "equity risk premium" in the
spreadsheet.  Rf is the risk free rate, which is the Treasury bill
rate.  Beta is also given.  Therefore, Re is 17%.

WACC is then 20/30*0.17 + 10/30*0.14 = 0.16 or 16%.

Sincerely,

Wonko