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A firm has a weighted average cost of capital of 11.28 percent and a cost of equity of 14.7 percent.?
The debt-equity ratio is .72. There are no taxes. What is the firm's cost of debt?
I need help with this problem
2 Answers
- olliverLv 64 years ago
WACC = Cost of equity x 1/(1+D/E) + Cost of debt x (1-tax rate) x (D/E)/(1+D/E)
11.28% = 14.7% x 1/(1+0.72) + Cost of debt x (1-0%) x (0.72)/(1+0.72) 6.53%
Cost of debt = (11.28% - 14.7% x 1/(1+0.72)) / ((1-0%) x (0.72)/(1+0.72)) = 6.53%
- GA41Lv 74 years ago
(.72*X + 14.7)/1.72= 11.28%---->(.72x+14.7)=(1.72)(11.28)
----->.72x+14.7=19.4016------>.72x= 4.7016---->
X= 6.53% Cost of debt
why: The average cost of capital is the weighted average of the cost of debt and the cost of equity. The debt to equity ratio is the debt/equity. If the debt to equity ratio is .72 that means debt .72/ 1 equity. Then the total of debt plus equity would be 1.72.; ( .72*cost of debt)+(1*cost of capital)/ 1.75 total debt plus equity = weighted average cost of capital.
