Blue Bull, Inc., has a target debt-equity ratio of .73. Its WACC is 8.7 percent,

Question

Blue Bull, Inc., has a target debt-equity ratio of .73. Its WACC is 8.7 percent, and the tax rate is 38 percent

If the company’s cost of equity is 11.3 percent, what is its pretax cost of debt?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

If the aftertax cost of debt is 5.5 percent, what is the cost of equity? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Blue Bull, Inc., has a target debt-equity ratio of .73. Its WACC is 8.7 percent, and the tax rate is 38 percent

Explanation / Answer

WACC = Wd×Rd×(1-t)+We×Ke

W is weights of respective portfolios

R is return on respective portfolios

0.087 = (0.73÷1.73)×0.055+(1÷1.73)×Ke

Cost of equity, Ke = 11.04%

0.087 = (0.73÷1.73)× Rd×(1-0.38)+(1÷1.73)×0.113

Pre-tax cost of debt, Rd = 8.29%

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