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Question 14 (1 point) A company has a cost of equity of 15.22% and an unlevered cost of capital of 11.29%. The company has $2

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Answer:
Levered Cost of Equity = 15.22%
Unlevered Cost of Equity = 11.29%
Tax Rate = 34%

Value of Debt = $20,050
Levered Value of Firm = Cost of Debt + Cost of Equity
$35,644 = $20,050 + Cost of Equity
Cost of Equity = $15,594

Cost of Debt = ??

Levered Cost of Equity = Unlevered Cost of Equity + (1 – Tax Rate) * Debt / Equity * (Unlevered Cost of Equity - Cost of Debt)
0.1522 = 0.1129 + (1 – 0.34)* $20,050 / $15,594 * (0.1129 – Cost of Debt)
0.0393 = 0.66 * $20,050 / $15,594 * (0.1129 – Cost of Debt)
0.0393 = 0.8486 * (0.1129 – Cost of Debt)
0.0393 = 0.095807 – 0.8486 * Cost of Debt
0.056507 = 0.8486 * Cost of Debt
Cost of Debt = 0.0666
or Cost of Debt = 6.66%

Therefore, Pre-tax cost of debt is 6.66%

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