Problem:
Acetate, Inc., has equity with a market value of $35 million and debt with a market value of $15 million. Treasury bills that mature in one year yield 2% per year, and the expected return on the market portfolio is 10%. The beta of Acetate's equity is 1.15. The firm pays no taxes.
Required:
Question 1: What is Acetate's debt-equity ratio?
Question 2: Assume Acetate could borrow at the Treasury rate. What is Acetate's WACC? (hint: use CAPM to solve for the cost of equity first)
Question 3: What is the cost of capital for an otherwise identical all-equity firm? (hint: use MM proposition II)
Question 4: What conclusion(s) could be drawn from your answers to part b and part c?
Note: Please describe comprehensively and provide step by step solution.