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Fyre, Inc., has a target debt-equity ratio of 1.60. Its WACC is 9.9 percent, and the tax rate is...

Question:

Fyre, Inc., has a target debt-equity ratio of 1.60. Its WACC is 9.9 percent, and the tax rate is 38 percent.

a. If the company's cost of equity is 16 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.)

b. If instead you know that the aftertax cost of debt is 6.6 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.)

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. PreTax cost of debt is 9.81%

b. Cost of equity is 15.17%

Part a:

  • Cost of equity, rs = 16%
  • Let the Cost of debt be rd
  • tax rate, t = 38% = 0.38
  • WA...

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Weighted Average Cost of Capital

from Finance 101: Principles of Finance

Chapter 14 / Lesson 5
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