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 40 percent. What is the cost of debt

Answer 1

Answer:

10.45 %

Explanation:

Calculation for What is the cost of debt

Using this formula

Levered cost of equity=Unlevered cost of equity+Equity multiplier(1-Tax rate)(Unlevered cost of equity-Cost of debt)

Let plug in the formula

.156 = .14 + .57(1 −.21)(.14 − Cost of debt )

.156 = .14 + .57(.79)(.14 − Cost of debt )

Cost of debt= .1045 *100

Cost of debt= 10.45%

Note that equity multiplier of 1.57 -1 will give us .57

Therefore the cost of debt will be 10.45%