Blue Bull, Inc., has a target debt-equity ratio of .70. Its WACC is 8.4 percent,

Question

Blue Bull, Inc., has a target debt-equity ratio of .70. Its WACC is 8.4 percent, and the tax rate is 35 percent.

If the company’s cost of equity is 11 percent, what is its pretax cost of debt? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

If the aftertax cost of debt is 5.2 percent, what is the cost of equity? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

Blue Bull, Inc., has a target debt-equity ratio of .70. Its WACC is 8.4 percent, and the tax rate is 35 percent.

Explanation / Answer

WACC = debt/debt+equity * Rd (1-taxrate)+ equity/debt+equity* Re

a) 8.4 % = 0.7/1.7 *Rd (1-0.35) +1/1.7 * 11%

=> pretax cost of debt Rd = 7.21%

b) 8.4%= 0.7/1.7 * 5.2% +1/1.7 * Re%

cost of equity Re = 10.64%

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