Fyre, Inc., has a target debtequity ratio of 1.30. Its WACC is 8.4 percent, and

Question

Fyre, Inc., has a target debtequity ratio of 1.30. Its WACC is 8.4 percent, and the tax rate is 40 percent.

If the company’s cost of equity is 13 percent, what is its pretax cost of debt?

If instead you know that the aftertax cost of debt is 3.7 percent, what is the cost of equity?

Fyre, Inc., has a target debtequity ratio of 1.30. Its WACC is 8.4 percent, and the tax rate is 40 percent.

If the company’s cost of equity is 13 percent, what is its pretax cost of debt?

If instead you know that the aftertax cost of debt is 3.7 percent, what is the cost of equity?

Explanation / Answer

Let the debt be X Let the equity be Y Debt+ Equity = 1 WACC = Debt* cost of debt / Total+ Equity*Cost of Equity/ Total Debt/ Equity = 1.3 y+1.3y= 1 y= 43.48% x = 56.52% 8.4 = 43.48*x(1-.4)+56.52*.13 X = 4.02% Pretax cost of debt =4.02%

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.