Kose, Inc., has a target debt?equity ratio of 1.20. Its WACC is 8.6 percent, and
ID: 2647371 • Letter: K
Question
Kose, Inc., has a target debt?equity ratio of 1.20. Its WACC is 8.6 percent, and the tax rate is 35 percent. a. If Kose?s cost of equity is 16 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)) Cost of debt b. If instead you know that the after tax cost of debt is 3.5 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)) Cost of equity %Explanation / Answer
a) 8.6% = 16%*1/2.20 + Kd*1.20/2.20
1.33% = 0.545 Kd
Kd = 2.43%
Pretax cost = 2.43% / (1 - .35) = 3.74%
b) 8.6% = Ke*1/2.20 + 3.5%*1.20/2.20
6.691% = .454Ke
Ke = 14.72%
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