Acetate, 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 Acetate?s equity is 0.9.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?