Solve for Cost of Equity and round to 2 decimal places Fyre, Inc., has a target

Question

Solve for Cost of Equity and round to 2 decimal places

Fyre, Inc., has a target debt-equity ratio of 1.40. Its WACC is 9.5 percent, and the tax rate is 35 percent. a. If the company's cost of equity is 12 percent, what is its pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of debt 11.9 % b. If instead you know that the aftertax cost of debt is 5.5 percent, what is the cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity

Explanation / Answer

Debt-equity ratio=Debt/equity

Hence debt=1.4equity

Let equity be $x

Hence debt=$1.4x

Total=$2.4x

WACC=Respective costs*Respective weights

9.5=(5.5*1.4x/2.4x)+(Cost of equity*x/2.4x)

9.5=3.20833+(Cost of equity/2.4)

Hence Cost of equity=(9.5-3.20833)*2.4

which is equal to

=15.10%

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