Problem:
Skillet Industries has a debt-equity ratio of 1.8. Its WACC is 9.1 percent, and its cost of debt is 7.1 percent. The corporate tax rate is 35 percent.
Requirement:
Question 1: What is the company's cost of equity capital?
Question 2: What is the company's unlevered cost of equity capital?
Question 3: What would the cost of equity be if the debt-equity ratio were 2?
Question 4: What would the cost of equity be if the debt-equity ratio were 1.0?
Question 5: What would the cost of equity be if the debt-equity ratio were zero?
Note: Provide support for your rationale.