Kose, Inc., has a target debt-equity ratio of 1.35. Its WACC is 8.3 percent, and

Question

Kose, Inc., has a target debt-equity ratio of 1.35. Its WACC is 8.3 percent, and the tax rate is 35 percent.

If Kose’s cost of equity is 14 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 3.8 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).)

Kose, Inc., has a target debt-equity ratio of 1.35. Its WACC is 8.3 percent, and the tax rate is 35 percent.

Explanation / Answer

We know that,

RWACC = (S/S+B) x Rs + (B /S+B) x RB x (1-tc)

(a)

So using this equation,

8.3 = (1/1+1.35) x 14 + (1.35 /1+1.35) x RB x (1-0.35)

8.3 = (0.4255) x 14 + (0.5745) x RB x (0.65)

8.3 = 5.957 + 0.373425 x RB

RB = 6.27%

(b)

Using the same equation,

8.3 = (1/1+1.35) x Rs + (1.35 /1+1.35) x 3.8

8.3 = (0.4255) x Rs + (0.5745) x 3.8

8.3 = (0.4255) x Rs + 2.1831

Rs = 14.38%

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