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?

I don't know to find formula

To find the formulas for RE and RD, we can use the weighted average cost of capital (WACC) equation. The WACC equation is:

WACC = (Equity / Total Capital) * RE + (Debt / Total Capital) * RD * (1 - Tax Rate)

Where:
- Equity represents the proportion of equity in the capital structure of the company.
- Debt represents the proportion of debt in the capital structure of the company.
- Total Capital represents the sum of equity and debt.
- RE represents the cost of equity.
- RD represents the pretax cost of debt.
- Tax Rate represents the tax rate.

By rearranging the equation, we can isolate RE and RD respectively:

To find RE:
RE = ((WACC * Total Capital) - (RD * (Debt / Total Capital) * (1 - Tax Rate))) / (Equity / Total Capital)

To find RD:
RD = ((WACC * Total Capital) - (RE * (Equity / Total Capital))) / ((Debt / Total Capital) * (1 - Tax Rate))

To find the formulas for RE (cost of equity) and RD (pretax cost of debt), we need to understand the components that make up the weighted average cost of capital (WACC) equation.

The WACC equation is:
WACC = (E/V)RE + (D/V)RD(1 - Tax rate)

Where:
- E/V is the proportion of equity in the capital structure (equity value divided by total value)
- RE is the cost of equity
- D/V is the proportion of debt in the capital structure (debt value divided by total value)
- RD is the pretax cost of debt
- Tax rate is the tax rate applicable to the company

Now let's derive the formulas for RE and RD:

(a) Finding the formula for RD (pretax cost of debt):

From the WACC equation:
WACC = (E/V)RE + (D/V)RD(1 - Tax rate)

Rearranging the equation, we get:
WACC - (E/V)RE = (D/V)RD(1 - Tax rate)

Simplifying further, we have:
RD = (WACC - (E/V)RE) / ((D/V)(1 - Tax rate))

Plugging in the given values from the problem, we can solve for RD.

(b) Finding the formula for RE (cost of equity):

From the WACC equation:
WACC = (E/V)RE + (D/V)RD(1 - Tax rate)

Rearranging the equation, we get:
WACC - (D/V)RD(1 - Tax rate) = (E/V)RE

Simplifying further, we have:
RE = (WACC - (D/V)RD(1 - Tax rate)) / (E/V)

Plugging in the given values from the problem, we can solve for RE.