Acetate Inc. has equity with a market value of $20 million and debt with amarket value of $10 million. The cost of the debt is 14 percent per annum.Treasury bills that mature in one year yield 8 percent per annum and theexpected return on the market portfolio over the next year is 18 percent. The betaof Acetate’s equity is 0.9. The firm pays no taxes.a. What is Acetate’s debt-equity ratio?b. What is the firm’s weighted average cost of capital?
