Fyre, Inc., has a target debtequity ratio of 1.70. Its WACC is 8.9 percent, and

Question

Fyre, Inc., has a target debtequity ratio of 1.70. Its WACC is 8.9 percent, and the tax rate is 35 percent. a. If the company’s cost of equity is 13 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 6.9 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

WACC = Wd×Rd×(1-t)+ We×Ke

W is weights of respective portfolios

R is return on respective portfolios

a)

8.9% = (1.7÷2.7)×Rd×(1-35%)+(1÷2.7)×13%

Pretax cost of debt = 9.98%

b)

8.9% = (1.7÷2.7)×6.9%+(1÷2.7)×Ke

Cost of equity. Ke = 12.3%

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