Tuesday

September 16, 2014

September 16, 2014

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

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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