Jefferson Electrical Supply has a cost of equity of 12% and an unlevered cost of capital of 10.5%. The company has $12,000 in debt that is selling at par value. The levered value of the ﬁrm is
$28,000 and the tax rate is 34%. What is the pre-tax cost of debt?

Question

Quizplus · Accepted Answer

The pre-tax cost of debt is calculated as follows:Pre-tax cost of debt = Levered cost of capital * (1 - Tax rate) / (1 - Debt-to-value ratio)= 12% * (1 - 0.34) / (1 - 12,000 / 28,000)= 12% * 0.66 / 0.58= 7.47%

Jefferson Electrical Supply Has a Cost of Equity of 12