Fyre, Inc., has a target debtequity ratio of 1.35. Its WACC is 8.3 percent, and
ID: 2786449 • Letter: F
Question
Fyre, Inc., has a target debtequity ratio of 1.35. Its WACC is 8.3 percent, and the tax rate is 35 percent.
If instead you know that the aftertax cost of debt is 3.8 percent, what is the cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Fyre, Inc., has a target debtequity ratio of 1.35. Its WACC is 8.3 percent, and the tax rate is 35 percent.
If instead you know that the aftertax cost of debt is 3.8 percent, what is the cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Cost of equity %Explanation / Answer
Debt-equity ratio=Debt/Equity
Let equity=$x
Debt=$1.35x
Total=$2.35x
WACC=Respective costs*Respective weights
0.083=(x/2.35x*Cost of equity)+(1.35x/2.35x*0.038)
0.083=(Cost of equity/2.35)+0.021829787
Hence Cost of equity=(0.083-0.021829787)*2.35
=14.38%(Approx).
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