Debt Equity & Cost of Capital
McCoy, Inc. has equity with a market value of $40 million and
debt with a market value of $20 million.
The cost of the debt is 6 percent semi-annually.
Treasury bills that mature in one year yield 5 percent per annum,
and the expected return on the market portfolio over the
next year is 15 percent.
The beta of McCoy’s equity is 0.8 .The firm pays no taxes.
a. What is McCoy'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?
