Using the following information about Drew Co. Inc. and the market (SPY), what is theWeighted Average Cost of Capital for DCI?Drew Co. IncDCI Stock Price# shares OutstandingCorporate Tax Rate =Risk-Free Rate10 yr Zero Coupon Bond20 Yr (semi-annual,) BondCoupon Rate of 20yr bondPreferred SharesPref. Payment RateStock ReturnsTimeDCISPY10.030.05230.250.180.10.0240.080.06Par ValueTime left 3:53:5580.80250,00040.00%3.00%Mkt Price(Quoted % ofPar)10,000,00050.0010,000,00070.005.00%10,000,000131.0012.00%

The market value of equity (E) can be calculated by multiplying the stock price by the number of…

Answered: Using the following information about…

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter14: Security Structures And Determining Enterprise Values

Section: Chapter Questions

Problem 1hM

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You have the following information on a company on which to base your calculations and discussion: Cost of equity capital (rE) = 18.55% Cost of debt (rD) = 7.85% Expected market premium (rM –rF) = 8.35% Risk-free rate (rF) = 5.95% Inflation = 0% Corporate tax rate (TC) = 35% Current long-term and target debt-equity ratio (D:E) = 2:5 a. What are the equity beta (bE) and debt beta (bD) of the firm described above?[Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.] b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio? c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)

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