Bermuda Cruises issues only common stocks and coupon bonds. The firm has a debt-equity ratio of 0.45. The cost of equity is 17.6 percent.
Required:
What is the pre-tax cost of the company debt if weighted average costs of the company is 13.5% and
the firm's tax rate is 35 percent?

The pre-tax cost of debt is 6.75%

Step-by-step explanation:

In this question, we are interested in calculating the pre-tax cost of the company debt.

To calculate this, we use the mathematical formula below;

Pre-tax cost of debt = (WACC - equity/(value * cost of debt)) / (debt equity ratio/ value * (1-tax rate))

From the question, we identify the parameters in the equation as follows :

WACC is weighted average cost of company = 13.5%

equity = 1

value = equity + debt-equity ratio = 1+ 0.45 = 1.45

Cost of equity = 17.6%

debt-equity ratio = 0.45

Tax rate = 35%

Now, substituting these values into the equation, we have;

Pre-tax cost of debt =

(13.5%(-1/(1.45*17.6%)/(0.45/(1.45*(1-35%))

= 0.0675 or 6.75%

Consider this example: say we want to convert x = 11 0101 1001₂ to base 3.

The binary expansion of x is

x = 1×2⁹ + 1×2⁸ + 1×2⁶ + 1×2⁴ + 1×2³ + 1×2⁰

which in base 10 reduces to

x = 512 + 256 + 64 + 16 + 8 + 1 = 857

Recall the first several powers of 3:

3⁰ = 1; 3¹ = 3; 3² = 9; 3³ = 27; 3⁴ = 81; 3⁵ = 243; 3⁶ = 729

Now it's a matter of computing quotients and remainders. Pick the largest power of 3 that fits into the target number, then check the remainder and repeat.

• How many times does the 729 go into 857? 1 time, and it leaves a remainder of 128, or

857 = 1×729 + 128 = 1×3⁶ + 128

• How many times does 81 go into 128? Also 1 time, so

128 = 1×81 + 47 = 1×3⁴ + 47

• How many times does 27 go into 47? Also 1 time,

47 = 1×27 + 20 = 1×3³ + 20

• How many times does 9 go into 20? 2 times,

20 = 18 + 2 = 2×9 + 2 = 2×3² + 2

• How many times does 1 go into 2? Also 2 times,

2 = 2 + 1 = 2×1 + 0 = 2×3⁰

So we found

857 = 1×3⁶ + 1×3⁴ + 1×3³ + 2×3² + 2×3⁰

which is the ternary expansion of x,

x = 1 011 202₃