Kose, Inc, has a target debt–equity ratio of

Finance Dec 21, 2020

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?

Expert Solution

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%

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