Kose, Inc., has a target debt–equity ratio of 1.75. Its WACC is 8.8 percent, and

Question

Kose, Inc., has a target debt–equity ratio of 1.75. Its WACC is 8.8 percent, and the tax rate is 38 percent.

If the company’s cost of equity is 14 percent, what is its pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

If instead you know that the aftertax cost of debt is 7.0 percent, what is the cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Kose, Inc., has a target debt–equity ratio of 1.75. Its WACC is 8.8 percent, and the tax rate is 38 percent.

Explanation / Answer

WACC = Wd×Rd×(1-t)+We×Ke

W is weights of respective portfolios

R is return on respective portfolios

Wd+We = 1

8.8% = (1.75/2.75)×Rd×(1-38%)+(1/2.75)×14%

Cost of debt, Rd = 9.4%

8.8% = (1.75/2.75)×7%+(1/2.75)×Ke

Cost of equity, Ke = 11.95%

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