Kose, Inc., has a target debt–equity ratio of 1.50. Its WACC is 8.0 percent, and

Question

Kose, Inc., has a target debt–equity ratio of 1.50. Its WACC is 8.0 percent, and the tax rate is 35 percent. a. If Kose’s cost of equity is 14 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 aftertax cost of debt is 4.1 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) Debt equity ratio = Debt/Equity

1.5 = Debt / 14%

Debt= 21%

Hence pre tax cost of debt is 21%

b ) given after tax cost of debt is 4.1% , tax rate is 35%,

Hence pre tax cost of debt will be 4.1/( 1-0.35) = 6.3%

Debt equity ratio = Debt / Equity

1.5 = 6.3%/ Equity

Equity = 42%

Hence cost of equity will be 4.2 %

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

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