Blue Bull, Inc., has a target debt-equity ratio of .78. Its WACC is 8.7 percent,

Question

Blue Bull, Inc., has a target debt-equity ratio of .78. Its WACC is 8.7 percent, and the tax rate is 38 percent.

If the company’s cost of equity is 11.8 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 6 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).)

Required: (a)

If the company’s cost of equity is 11.8 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).)

Explanation / Answer

(a)

Thus, Pre tax Cost of Debt is (-) 6.41%

(b)

Thus, Cost of Equity is 4.02%.

WACC Cost of equity*Weight of Equity+Pre Tax Cost of debt(1-.38)*weight of debt 8.7 11.8*1+Pre tax Cost of debt(1-.38)*.78 8.7 11.8+Pretax Cost of debt(1-.38)*78 Pre TaX Cost of Debt(1-.38)*.78                               -3.10 Pre taxCost of Debt(1-.38) -3.97 Pretax Cost of Debt(.62) -3.97 Pretax Cost of Debt -6.41

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