Williamson, Inc

a) Computation of Company's Cost of Equity:

Weighted Average Cost of Capital = Weight of Debt * Cost of Debt * (1 - Tax Rate) + Weight of Equity * Cost of Equity

8.4% = (1.7/(1+1.7)) * 5.3% * (1 - 21%) + (1/(1+1.7)) * Cost of Equity

8.4% = 2.64% + (1/2.7) * Cost of Equity

8.4% - 2.64% =  (1/2.7) * Cost of Equity

Cost of Equity = 5.76%*2.7/1

Cost of Equity = 15.56%

b) Computation of Company's Levered Cost of Equity:

Using Modigillani Miller formula,

rL = rU + D/E ( rU - rD) * ( 1 - Tax Rate)

15.56% = rU + 1.7 * (rU - 5.3%)* (1 -0.21)

15.56% = ru * 1.343 * ( rU - 5.3%)

15.56% + 7.12% = 2.343 * rU

Unlevered Cost of Equity = rU = 9.68%

c) Computation of Company's weighted average cost of capital be if the firm's debt-equity ratio were 0.6:

Levered Cost of Equity = 9.68% + 0.6 * (9.8% - 5.3%) * ( 1 - 0.21) = 11.76%

Weighted Average Cost of Capital = (0.6/1.6) * 5.3% * (1 - 21%) + (1/1.6) * 11.76% = 1.87 + 8.54 = 8.92%