Question

Starset, Inc., has a target debt-equity ratio of 0.85. Its WACC is 11 percent, and the tax rate is 34 percent. If the company's cost of equity is 16.5 percent, what is the pretax cost of debt?

If instead you know that the aftertax cost of debt is 6.6 percent, what is the cost of equity?

Answer 1

Given,

Debt equity ratio = 0.85

WACC = 11%

Tax rate = 34% or 0.34

Cost of equity (K_e) = 16.5%

Solution :-

Let pretax cost of debt be K_d ,