Blue Bull, Inc., has a target debt-equity ratio of .81. Its WACC is 8.5 percent,

Question

Blue Bull, Inc., has a target debt-equity ratio of .81. Its WACC is 8.5 percent, and the tax rate is 34 percent.

If the company’s cost of equity is 12.1 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 5.2 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 .81. Its WACC is 8.5 percent, and the tax rate is 34 percent.

Explanation / Answer

D/E Ratio = 0.81

Weght of Debt = (81/181)

WEight of Equity = (100/181)

Cost of equity = 12.1%

WACC = 8.5%

So, 8.5% = (81/181)*kd + (100/181)*12.1%

=> 1.81491 = (81/181)*kd

=> kd = 4.056%

Pre-tax cost of debt = 4.056%/(1-.34) = 6.145%

(b) 8.5% = (81/181)*5.2% + (100/181*ke)

=> 6.1729% = 100/181*ke

=> Cost of equity = 11.173%

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