Homework Help: Business Finance

Posted by Matt on Sunday, October 31, 2010 at 5:21pm.

Jungle, Inc., has a target debt−equity ratio of 0.72. Its WACC is 11 percent, and the tax rate is 31 percent. (Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16))

Required:
(a) If Jungle's cost of equity is 14 percent, its pretax cost of debt is percent.

(b) If instead you know the aftertax cost of debt is 6.7 percent, the cost of equity is percent.

Explanation:
(a): Using the equation to calculate WACC, we find:
WACC = 0.11 = (1/1.72)(0.14) + (0.72/1.72)(1 – 0.31)RD
RD = 0.099 or 9.9%

(b): Using the equation to calculate WACC, we find:
WACC = 0.11 = (1/1.72)RE + (0.72/1.72)(0.067)
RE = 0.141 or 14.1%

In this example problem, how would you find the formulas for RE and RD?

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