10. value: 7.69 points Paget, Inc., has a target debt?equity ratio of 1.80. Its

Question

10.

value:
7.69 points

Paget, Inc., has a target debt?equity ratio of 1.80. Its WACC is 8.7 percent, and the tax rate is 40 percent.

If the company

Paget, Inc., has a target debt?equity ratio of 1.80. Its WACC is 8.7 percent, and the tax rate is 40 percent.

Explanation / Answer

a> Debt/Equity=1.8 Debt % =(1.8/2.8)*100 64.29 Equity % = 100-64.29 35.71 WACC=8.7 0r 0.3571*15+0.6429D=8.7 or D=(8.7-15*0.3571)/0.6429 5.20 Pretax cost of debt=5.20*100/(100-40) 8.67 Pretax cost of debt is 8.67% b> or 0.3571E+7.1*0.6429=8.7 or E=(8.7-7.1*0.6429)/0.3571 11.58 Cost of Equity is 11.58%

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