Kose, Inc., has a target debt–equity ratio of .45. Its WACC is 11.2 percent, and
ID: 2499125 • Letter: K
Question
Kose, Inc., has a target debt–equity ratio of .45. Its WACC is 11.2 percent, and the tax rate is 35 percent.
If Kose’s cost of equity is 15 percent, what is its pretax cost of debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
If instead you know that the aftertax cost of debt is 6.4 percent, what is the cost of equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
a.
If Kose’s cost of equity is 15 percent, what is its pretax cost of debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
A./ DEBT EQUOITY RATIO= 0.45 (I;E DEBT0.45 AND EQUITY0.55)
WACC= WEIGHT* Kd + WEIGHT * Ke
Kd= COST OF DEBT
Ke= COST OF EQUITY
11.2%= 0.45 * Kd + 0.55 * 15%
Kd=6.56% (AFTER TAX)
PRE TAX Kd= 6.56% /65% *100%
10.09%
B./
DEBT EQUOITY RATIO= 0.45 (I;E DEBT0.45 AND EQUITY0.55)
WACC= WEIGHT* Kd + WEIGHT * Ke
Kd= COST OF DEBT
Ke= COST OF EQUITY
11.2%= 0.45 * 6.4% + 0.55 * Ke
Ke=15.13%
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