Chapter 12, Problem 14QP

a)

Summary Introduction

To determine: The pre-tax cost of debt

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity. The cost of equity refers to the return that the equity shareholders expect on an equity capital.

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

b)

Summary Introduction

To determine: The cost of equity

Introduction:

The weighted average cost of capital (WACC) refers to the weighted average of the cost of debt after taxes and the cost of equity. The cost of equity refers to the return that the equity shareholders expect on an equity capital.

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.