Fyre, Inc., has a target debt-equity ratio of 1.30. Its WACC is 8.4 percent, and

Question

Fyre, Inc., has a target debt-equity 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? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) If instead you know that the aftertax cost of debt is 3.7 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.)

Explanation / Answer

Ans;

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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