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Homework answers / question archive / Kose, Inc, has a target debt–equity ratio of
Kose, Inc, has a target debt–equity ratio of .45. Its WACC is 9.8 percent, and the tax rate is 35 percent. a. If Kose’s cost of equity is 13 percent, what is its pre-tax cost of debt? b. If instead you know that the after-tax cost of debt is 5.9 percent, what is the cost of equity?
WACC=(weight of equity*cost of equity)+(weight of debt*after tax cost of debt)
weight of debt=0.45/(1+0.45)=31.03%
weight of equity=1/(1+0.45)=68.97%
a. 9.8%=(68.97%*13%)+(31.03%*after tax cost of debt)
(31.03%*after tax cost of debt)=9.8%-8.97%=0.83%
after tax cost of debt=0.83%/31.03%=2.69%
pre tax cost of debt*(1-tax arte)=after tax cost of debt
pre tax cost of debt=2.69%/(1-35%)=4.14%
b. 9.8%=(68.97%*cost of equity)+(31.03%*5.9%)
(68.97%*cost of equity)=9.8%-1.83%=7.97%
cost of equity=7.97%/68.97%=11.56%
