Frye, Inc., has a target debt-equity ratio of 1.60. Its WACC is 9.9 percent, and

Question

Frye, Inc., has a target debt-equity ratio of 1.60. Its WACC is 9.9 percent, and the tax rate is 38 percent. If the company's cost of equity is 16 percent, what is its pretax cost of debt? If instead you know that the aftertax cost of debt is 6.6 percent, what is the cost of equity? Please round answers to 2 decimal places and show each step. Frye, Inc., has a target debt-equity ratio of 1.60. Its WACC is 9.9 percent, and the tax rate is 38 percent. If the company's cost of equity is 16 percent, what is its pretax cost of debt? If instead you know that the aftertax cost of debt is 6.6 percent, what is the cost of equity? Please round answers to 2 decimal places and show each step.

Explanation / Answer

Part 1:

WACC = 1 / (1 + Debt-equity ratio) * [(1 - tax rate) * pre-tax cost of debt * Debt-equity ratio + cost of equity]

=> 9.90% = 1 / (1 + 1.60) * [(1 - 38%) * pre-tax cost of debt * 1.60 + 16%]

=> pre-tax cost of debt = 9.82%

Part 2:

WACC = 1 / (1 + Debt-equity ratio) * [after-tax cost of debt * Debt-equity ratio + cost of equity]

=> 9,90% = 1 / (1 + 1.60) * [6.60% * 1.60 + cost of equity]

=> cost of equity = 15.18%

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