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Kose, Inc. target debt-equity ratio of 0.74, Cost of equity?

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Kose, Inc., has a target debt-equity ratio of 0.74. Its WACC is 12 percent, and the tax rate is 35 percent.

1.) If Kose's cost of equity is 14.5 percent, what is its pretax cost of debt? (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

2.) If instead you know that the aftertax cost of debt is 5.8 percent, what is the cost of equity? (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

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I created a model in Excel to show you how this works. You have to work backwards which makes it tricky algebra. Click in cells to see computations. Column headings guide you through the process and instructional comments give you clues.

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  • MSc, University of Virginia
  • PhD, Georgia State University
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