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Rom4ik [11]
3 years ago
9

has a target debt−equity ratio of 1.35. Its WACC is 8.3 percent, and the tax rate is 35 percent. If the company’s cost of equity

is 14 percent, what is its pretax cost of debt? (Do not round intermediate calculations. Enter yo
Business
1 answer:
dsp733 years ago
5 0

Answer:

5.74%

Explanation:

WACC = weight of equity x cost of equity +  weight of debt x cost of debt x (1 - tax rate)

weight of debt =  D / (D + E) = 1.35/ (1.35 + 1) = 0.574468 = 57.4468%

weight of equity = 100% - 57.4468% = 42.5532%

let x represent pretax cost of debt

8.1% = 0.425532 x 14% +( 0.574468x) x 0.65

8.1% = 0.373404x + 5.957448%

solve for x

x = 5.74%

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