Paget, Inc., has a target debtequity ratio of 1.45. Its WACC is 9.6 percent, and
ID: 2660948 • Letter: P
Question
Paget, Inc., has a target debtequity ratio of 1.45. Its WACC is 9.6 percent, and the tax rate is 38 percent.
If the companys cost of equity is 13 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 5.6 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))
Paget, Inc., has a target debtequity ratio of 1.45. Its WACC is 9.6 percent, and the tax rate is 38 percent.
Explanation / Answer
A]LET THE AFTER TAX COST OF DEBT BE KD
WACC = KD*WD + KE*WE
9.6 = KD*[1.45/(1+1.45)] + 13*[1/(1+1.45)]
9.6 = KD*0.5918 + 5.3061
0.5918*KD = 4.2939
KD = 4.2939/0.5918
KD = 7.26%
THERFORE . PRETAX COST OF DEBT = AFTERTAX COST OF DEBT/(1-t)
= 7.26/(1-0.38)
=11.71% [ANSWER]
B]LET COST OF EQUITY BE KE
NOW,
WACC = KD*WD + KE*WE
9.6 = 5.6*[1.45/(1+1.45)] + KE*[1/(1+1.45)]
9.6 = 3.3143 + KE*0.4082
0.4082* KE = 6.2857
KE = 15.40% [ANSWER]
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.