Matroyshka, Inc., has a target debt−equity ratio of 1.55. Its WACC is 7.9 percent, and the tax rate is 38 percent. If the company’s cost of equity is 15 percent, what is its pretax cost of debt?

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Matroyshka, Inc., has a target debt−equity ratio of 1.55. Its WACC is 7.9 percent, and the tax rate is 38 percent.

a. If the company’s cost of equity is 15 percent, what is its pretax cost of debt?

Target DE Ratio 1.55
WACC 0.079
Tax Rate 0.38
Cost E 0.15
(Equity%) Cost E Debt% TaxRate Cost Debt
WACC Formula 0.079 = 0.392156863 0.15 + 0.607843137 0.62 x
(Solve for x) 0.079 = 0.058823529 + 0.376862745 x
0.020176471 = 0.376862745 x
0.053537981 = x

Method 2 0.053537981 = 0.079 =F11*G11+I11*J11*D16
(Goal Seek)
Use What if goal seek
Set Cell F15 to WACC .079
By Changing Cell D16 (Answer cell)

Goal Seek is in the Analysis Tab in the Forecase area, under "what-if Analysis" Drop Down

b. If instead you know that the aftertax cost of debt is 4.2 percent, what is the cost of equity?
After tax cost Debt 0.042
WACC Formula
(solve for x) 0.079 = 0.392156863 x + 0.607843137 0.042
0.079 = 0.392156863 x + 0.025529412
0.053470588 = 0.392156863 x
0.13635 = x