DL Trucking has a cost of equity of 15.4 percent and an unlevered cost of capital of 13.2 percent.The company has $24,000 in debt that is selling at par value.The levered value of the firm is $59,000 and the tax rate is 34 percent.What is the pretax cost of debt?
A)8)75%
B)8)34%
C)7)38%
D)9)20%
E)9)69%

Question

Quizplus · Accepted Answer

V_E = $59,000 - $24,000 = $35,000 0.154 = 0.132 + ($24,000 / $35,000)(1 - 0.34)(0.132 - R_B) R_B = 0.0834,or 8.34%

DL Trucking Has a Cost of Equity of 15