Question

WB Industries has a debt-equity ratio of .8. Its WACC is 9.2 percent, and its cost of debt is 4.9 percent. The corporate tax rate is 35 percent.
What is the company's cost of equity capital?

9.21%

10.02%

8.45%

11.67%

14.01%

Answer 1

Cost of debt after-tax=4.9*(1-tax rate)

=4.9*(1-0.35)=3.185%

Debt-equity ratio=debt/equity

Hence debt=0.8*equity

Let equity be $x

Debt=$0.8x

Total=$1.8x

WACC=Respective cost*Respective weight

9.2=(x/1.8x*Cost of equity)+(0.8x/1.8x*3.185)

9.2=(1/1.8*Cost of equity)+1.41555556

Cost of equity=(9.2-1.41555556)*1.8

=14.01%(Approx)