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FinanceQ&A LibraryKose, 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

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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? |

b. |
If instead you know that the aftertax cost of debt is 5.8 percent, what is the cost of equity? |

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...

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