Target debt- equity ratio-what is the cost of equity

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Reference no: EM131055576

Blue Bull, Inc., has a target debt- equity ratio of .55. Its WACC is 8.1 percent, and the tax rate is 35 percent. a. If the company’s cost of equity is 11 percent, what is its pretax cost of debt? b. If the aftertax cost of debt is 3.8 percent, what is the cost of equity? Please explain the below...

a. Using the equation to calculate WACC, we find:

WACC = .081 = (1/1.55)(.11) + (.55/1.55)(1 – .35)RD

RD = .0435, or 4.35% (Where did this answer come from)?

b. Using the equation to calculate WACC, we find:

WACC = .081 = (1/1.55)RE + (.55/1.55)(.038)

RE = .1047, or 10.47%

Reference no: EM131055576

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