DL Trucking has a cost of equity of 14.4 percent and an unlevered cost of capital of 13 percent.The company has $20,000 in debt that is selling at par value.The levered value of the firm is $46,000 and the tax rate is 35 percent.What is the pretax cost of debt?
A)11.75%
B)10.20%
C)9.38%
D)11.20%
E)12.35%

Question

Quizplus · Accepted Answer

V_E = $46,000 - 20,000 = $26,000.144 = .13 + ($20,000/$26,000)(1 - .35)(.13 - R_B)R_B = .1020,or 10.20%

DL Trucking Has a Cost of Equity of 14