Kose, Inc., has a target debt-equity ratio of 1.31. Its WACC is 8.1 percent, and the tax rate is 22 percent. a.If the company’s cost of equity is 12 percent, what is its pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)b.If instead you know that the aftertax cost of debt is 5.8 percent, what is the cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Question
Asked Jun 9, 2019
1426 views

Kose, Inc., has a target debt-equity ratio of 1.31. Its WACC is 8.1 percent, and the tax rate is 22 percent.

 

a.

If the company’s cost of equity is 12 percent, what is its pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b.

If instead you know that the aftertax cost of debt is 5.8 percent, what is the cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

check_circle

Expert Answer

star
star
star
star
star
1 Rating
Step 1

Kose, Inc., has a target debt-equity ratio of 1.31. Its WACC is 8.1 percent, and the tax rate is 22 percent.

Hence, D / E = 1.31

Hence, proportion of debt in capital structure = Wd = D / (D + E) = 1.31 / (1.31 + 1) = 56.71%

Proportion of equity, We = 1 - Wd = 1 - 56.71% = 43.29%

WACC = 8.10%, Tax rate, T = 22%

Step 2

Part (a)

Company’s cost of equity, Ke =12%

Let its pretax cost of debt be Kd.

Then, WACC = 8.10% = Wd x Kd x (1 - T) + We x Ke = 56.71% x Kd x (1 - 22%) + 43.29% x 12%

Or, 8.10% = 44.23% x Kd + 5.19%

Hence, Kd = (8.10% - 5.19%) / 44.23% = 6.57%

Step 3

Hence, final answer for part (a)

Pre ta...

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in
BusinessFinance

Capital Structure

Related Finance Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Modern Artifacts can produce keepsakes that will be sold for $270 each. Nondepreciation fixed costs ...

A: a)Calculation of degree of operating leverage when sales are $16,740:Excel spread sheet:

question_answer

Q: NoGrowth Corporation currently pays a dividend of $2.08 per​ year, and it will continue to pay this ...

A: Cost of Equity: It is the cost of the company while raising finance by issuing equity. It is earning...

question_answer

Q: Todd Foley is applying for a $290,000 mortgage. He can get a $2,030 monthly payment for principal an...

A: Calculation of number of months:Excel spreadsheet for calculation of number of months 

question_answer

Q: The simplified balance sheet for the Dutch manufacturer Rensselaer Felt (figures in € thousands) is ...

A: The firm has three sources of capital:Short term debtLong term debtEquityWe need to estimate the mar...

question_answer

Q: Why so many mergers fail to produce the expected synergistic gains?

A: Merger:It is an agreement which unites two or more companies into a new company. It helps companies ...

question_answer

Q: Laura is saving for the college education of hertwochildren. They are two years apart in age; one wi...

A: As a first step let’s plot the cash flows on a time diagram.Please see the white board. In the table...

question_answer

Q: One year ago, Berardi corporation issued a series of 13% semiannual coupon callable bonds with par v...

A: We will use the RATE function inexcel to calculate the yield. Before we do so, please note the follo...

question_answer

Q: You are head of the Schwartz Family Endowment for the Arts. You have decided to fund an arts school ...

A: Calculation of PV of the Gift:In order to calculate the present value of the gift, it is necessary t...

question_answer

Q: What are the benefits of pro forma financial statements?

A: Pro forma financial statement:Pro forma financial statements is a report which are prepared on the b...