A firm uses only debt and equity in its capital structure.The firm's weight of equity is 35 percent.The firm's cost of equity is 14 percent and it has a tax rate of 30 percent.If the firm's WACC is 11 percent,what is the firm's before-tax cost of debt?
A) 13.41 percent
B) 6.10 percent
C) 5.50 percent
D) −3.00 percent

Question

Quizplus · Accepted Answer

11% = 0.35 (14%) + (1 − 0.35) (cost of debt) (1 − 0.3);6.1% = (1 − 0.35) (cost of debt) (1 − 0.3); cost of debt = 13.41%

A Firm Uses Only Debt and Equity in Its Capital