Debt-equity ratio=debt/equity
Hence debt=0.77equity
Let equity be $x
Hence debt=0.77x
Total=1.77x
WACC=Respective costs*Respective weight
a.
11=(x/1.77x*16)+(0.77x/1.77x*Cost of debt)
11=9.03954802+(0.77/1.77*Cost of debt)
cost of debt=(11-9.03954802)*1.77/0.77
=4.50649351%
Pre-tax cost of debt=Cost of debt/(1-tax rate)
4.50649351/(1-0.35)
=6.93%(Approx).
b.
11=(0.77x/1.77x*6)+(x/1.77x*Cost of equity)
11=2.61016949+(x/1.77x*Cost of equity)
Cost of equity=(11-2.61016949)*1.77
=14.85%
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