Cost Of Capital Acetate Inc.

Cost of Capital: Acetate, Inc., has equity with a market value of $35 million and debt with a market value of $14 million. Treasury bills that mature in one year yield 6 percent per year, and the expected return on the market portfolio is 13 percent. The beta of Acetate's equity is 1.15. The firm pays not taxes.c. What is the cost of capital for an otherwise identical all-equity firm?Solution:-1) Computation of debt-equity ratio:-Debt-equity ratio = Market value of debt/Market value of equityDebt-equity ratio = 14000000/35000000Debt-equity ratio = 0.42) Computation of firm's weighted average cost of capital:-WACC = (Kd*(D/(D+E))) + (Ke*(E/(D+E)))Market value of equity ( E )= 35 MillionMarket value of debt ( D ) = 14 MillionRisk free rate of return ( Rf )= 6%Market rate of return ( Rm ) = 13%Beta of Company ( B )= 1.15Cost of equity (Using CAPM) = Rf + (B*(Rm-Rf))Cost of equity (Using CAPM) = 6%+(1.15*(13%-6%))Cost of equity (Using CAPM) = 14.05%Cost of debt = 13% Note: There is no such details present in the assignment which might help us in calculating the cost of debt, therefore we have assumed it to be equal to 13% i.e. market rate of returnWACC =