Question

Starset, Inc., has a target debt-equity ratio of 1.30. Its WACC is 8.8 percent, and the tax rate is 23 percent. a. If the company’s cost of equity is 12 percent, what is its pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If instead you know that the aftertax cost of debt is 6.3 percent, what is the cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

1.
=(8.8%-1/2.30*12%)/(1-23%)*2.30/1.30
=8.23%

2.
=(8.8%-1.30/2.30*6.3%)/(1/2.30)
=12.05%