Kose, Inc., has a target debt–equity ratio of 1.20. Its WACC is 8.6 percent, and
ID: 2750631 • 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.
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))
If instead you know that the aftertax 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))
Kose, Inc., has a target debt–equity ratio of 1.20. Its WACC is 8.6 percent, and the tax rate is 35 percent.
Explanation / Answer
Debt-equity = 1.20 or 120/100 , therefore total value of firm(Debt + Equity) = 120+100 = 220
a. WACC = cost of equity * equity /( debt + equity) + cost of debt * Debt /( debt + equity)
0.086 = 0.16 * 100 / 220 + kd * 120 /220
0.086 = 0.073 + kd * 120 /220
(0.086 - 0.073)* 220 /120 = Kd
kd = 2.38%
cost of debt = 2.38%
b. WACC = cost of equity * equity /( debt + equity) + cost of debt * Debt /( debt + equity) * (1-tax)
0.086 = cost of equity * 100 /220 + 0.035 * 120/220
0.086 = cost of equity * 100 /220 + 0.019
cost of equity = (0.086 - 0.019) * 220/100
cost of equity = 14.74%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.