Case Scenario: 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% semi-annually. Treasury bills that mature in one year field 5% per annum, and the expected return on the market portfolio over the next is 15%. The beta of McCoy's equity is 0.8. The firm pays no taxes.
Required to do:
1. What is McCoy's debt-equity ratio?
2. What is the firm's weighted average cost of capital?
3. What is the cost of capital for an otherwise identical all-equity firm?