Please and thank you! Fyre, Inc., has a target debt-equity ratio of 1.80. Its WA

Question

Please and thank you!

Fyre, Inc., has a target debt-equity ratio of 1.80. Its WACC is 8.7 percent, and the tax rate is 40 percent a. If the company's cost of equity is 15 percent, what is its pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.) Cost of debt b. If instead you know that the aftertax cost of debt is 7.1 percent, what is the cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.9., 32.16.) Cost of equity

Explanation / Answer

Debt-equity ratio=Debt/Equity

Let equity be x

Hence debt=1.8x

Total=2.8x

a.WACC=Respective costs*Respective weights

0.087=(x/2.8x*0.15)+(1.8x/2.8x*Cost of debt)

(0.087-0.053571428)=(1.8/2.8*Cost of debt)

Hencce Cost of debt=(0.087-0.053571428)*(2.8/1.8)

=0.052

Hence pretax cost of debt=0.052/(1-0.4)=8.67%(Approx)

2.

0.087=(x/2.8x*Cost of equity)+(1.8x/2.8x*0.071)

(0.087-0.045642857)*2.8=Cost of equity

Hence Cost of equity=11.58%

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