Garnet, Inc., has a target debt-equity ratio of 0.59. Its WACC is 11.4 %, and the...

Garnet, Inc., has a target debt-equity ratio of 0.59. Its WACC is 11.4 %, and the tax rate is 36 %

If you know that the after-tax cost of debt is 6.5%, what is the cost of equity? (Report answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations).

Expert Solution

Debt-equity ratio=debt/equity

Hence debt=0.59*equity

Let equity be $x

Debt=$0.59x

Total=$1.59x

WACC=Respective cost*Respective weight

11.4=(x/1.59x*Cost of equity)+(0.59x/1.59x*6.5)

11.4=(1/1.59*Cost of equity)+2.41194969

Cost of equity =(11.4-2.41194969)*1.59

=14.29%(Approx)

jeff jeffy answered 2 years ago

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