Matroyshka Inc has a target debtequity ratio of 150 Its WACC

Matroyshka, Inc., has a target debt?equity ratio of 1.50. Its WACC is 8 percent, and the tax rate is 35 percent.

a. If the company’s cost of equity is 14 percent, what is its pretax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Pretax cost of debt             %

b. If instead you know that the aftertax cost of debt is 4.1 percent, what is the cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Cost of equity             %

Solution

a. 8% = (1.50*pretax cost*(1 - 0.35) + 1*14%)/2.50

pretax cost of debt = 6.15%

b. 8% = (1.5*4.1% + 1*cost of equity)/2.5

cost of equity = 13.85%