Question

A firm has an equity multiplier of 1.57, an unlevered cost of equity of 14 percent, a levered cost of equity of 15.6 percent, and a tax rate of 21 percent. What is the cost of debt

Answer 1

Answer:

10.45%

Explanation:

Calculation to determine the cost of debt

B/S = 1.57 − 1

B/S = .57

.156 = .14 + .57(1 −.21)(.14 − RB)

.156 = .14 + .57(.79)(.14 − RB)

RB = .1045*100

RB= 10.45%

Therefore the cost of debt is 10.45%