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Clifford, Inc., has a target debt?equity ratio of .78. Its WACC is 8.7 percent, and the tax rate...

Question:

Clifford, Inc., has a target debt?equity ratio of .78. Its WACC is 8.7 percent, and the tax rate is 38 percent.

a. If the company's cost of equity is 11.8 percent, what is its pretax cost of debt?

b. If the aftertax cost of debt is 6 percent, what is the cost of equity?

Weighted Average Cost of Capital:

A company's capital structure consists of several sources of funds such as Common stock, Preferred stock and debt. Each source of fund has its own cost. Weighted Average Cost of Capital is the weighted average cost of all these sources of funds.

Answer and Explanation:

a. The pretax cost of debt is 7.62%

b. The cost of equity is 10.81%

Part a:

  • Cost of equity, rs = 11.8%
  • Let the cost of debt be rd
  • debt to equity...

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Weighted Average Cost of Capital

from Finance 101: Principles of Finance

Chapter 14 / Lesson 5
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