Blue Co. is funded only by debt and equity with a weighted average cost of capital at 20%. The debt ratio of the company is 20%. Using the discounted cash flow model, the cost of equity is determined at 10%. The applicable after-tax rate of the company is 80%. Determine the cost of debt before the application of the tax shield. (In percentage, put percentage sign)

Blue Co. is funded only by debt and equity with a weighted average cost of capital at 20%. The debt ratio of the company is 20%. Using the discounted cash flow model, the cost of equity is determined at 10%. The applicable after-tax rate of the company is 80%. Determine the cost of debt before the application of the tax shield. (In percentage, put percentage sign)

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter10: Forecasting Financial Statement

Section: Chapter Questions

Problem 8QE

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Bulldogs Inc., which has 20% income tax rate, is funded by debt and common equity. The equity ratio of the company is 70% while the weighted average cost of capital is 20.75%. The cost of equity, which is based on the readily available data, is calculated using cost of retained earnings at 12.50%. What is the cost of debt after the effect of tax shield? (In percentage, type the percentage sign on your answer)
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