Computation of Company's Cost of Equity Capital:

Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt * Weight of Debt] + [Cost of Equity * Weight of Equity]

10.00% = [(6.00% * (1-35%)) * (2.45/3.45)] + [Cost of Equity * (1 / 3.45)]

10.00% = [3.90% * 0.7101] + [Cost of Equity * 0.2899]

10.00% = 2.77% + Cost of Equity * 0.2899

7.23% = Cost of Equity * 0.2899

Cost of Equity = 7.23% / 0.2899

Cost of Equity = 24.95%

 

Computation of Unlevered Cost of Equity:

Unlevered Cost of Equity = Cost of Equity + Pre-tax Cost of Debt*D/E*(1-Tax Rate))/(1+D/E*(1-Tax Rate))

= 24.95% + 6%*2.45*(1-35%) / (1+2.45*(1-35%))

= 13.31%

 

 

Computation of Williamson's Weighted Average Cost of Capital if the debt-to-equity ratio is 0.80:

Weight Average Cost of Capital =D/E*1/(1+D/E)*Pre-tax Cost of Debt*(1-Tax Rate)+(Unlevered Cost+(Unlevered Cost- Pre-tax cost of debt)*D/E*(1-tax rate))*1/(1+D/E)

=0.80/1.80*6%*(1-35%)+(13.31%+(13.31%-6%)*0.80*(1-35%))*1/1.80

= 1.73% + 9.51%

=11.24%

 

Computation of Williamson's Weighted Average Cost of Capital if the debt-to-equity ratio is 1.70:

Weight Average Cost of Capital =D/E*1/(1+D/E)*Pre-tax Cost of Debt*(1-Tax Rate)+(Unlevered Cost+(Unlevered Cost- Pre-tax cost of debt)*D/E*(1-tax rate))*1/(1+D/E)

=1.70/2.70*6%*(1-35%)+(13.31%+(13.31%-6%)*1.70*(1-35%))*1/2.70

= 2.46% + 7.92%

= 10.38%