Fyre, Inc., has a target debtequity ratio of 1.30. Its WACC is 8.4 percent, and
ID: 2718931 • Letter: F
Question
Fyre, Inc., has a target debtequity ratio of 1.30. Its WACC is 8.4 percent, and the tax rate is 40 percent.
If the company’s cost of equity is 13 percent, what is its pretax cost of debt?
If instead you know that the aftertax cost of debt is 3.7 percent, what is the cost of equity?
Fyre, Inc., has a target debtequity ratio of 1.30. Its WACC is 8.4 percent, and the tax rate is 40 percent.
If the company’s cost of equity is 13 percent, what is its pretax cost of debt?
If instead you know that the aftertax cost of debt is 3.7 percent, what is the cost of equity?
Explanation / Answer
WACC = (equity/(debt+equity))*cost of equity + (debt/(debt+equity)) *cost of debt *(1-tax rate)
8.4% = (1/2.3)*13% + (1.3/2.3) *cost of debt *0.60
0.084 = 0.0565+ 0.3391*cost of debt
0.3391*cost of debt = 0.0275
cost of debt = 8.1033%
2.
WACC = (equity/(debt+equity))*cost of equity + (debt/(debt+equity)) *cost of debt *(1-tax rate)
8.4% = (1/2.3)*cost of equity + (1.3/2.3) *3.7%
0.084 =0.4348*cost of equity + 0.0209
cost of equity = 14.51%
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