Calculate Weighted Average Cost of Capital (WACC) for Zeta Ltd.

What is Zeta Ltd.'s pre-tax cost of debt if the company has a cost of equity of 14%?

a) Calculate the pre-tax cost of debt for Zeta Ltd.

What is Zeta Ltd.'s cost of equity if the after-tax cost of debt is 5.5%?

b) Determine the cost of equity for Zeta Ltd.

a) The pre-tax cost of debt for Zeta Ltd. is 8.98%.
b) The cost of equity for Zeta Ltd. is 14.28%.

In order to calculate the Weighted Average Cost of Capital (WACC) for Zeta Ltd., we first need to determine the pre-tax cost of debt and the cost of equity based on the given information:

a) To find the pre-tax cost of debt:

Given Debt-to-Equity ratio = 0.35

Let Debt = x, Equity = 1 - Debt = 1 - x

Debt / Equity = 0.35

x / (1 - x) = 0.35

x = 0.35 - 0.35 x

1.35x = 0.35

x = 0.35 / 1.35 = 0.2593

1 - x = 1 - 0.2593 = 0.7407

Corporate tax rate (t) = 30%

WACC = 12%

Pre-tax cost of debt = [WACC - (We * re)] / [Wd * (1 - t)]

Pre-tax cost of debt = 12% - (0.7407 * 14%) / 0.2593 * (1 - 30%)

Pre-tax cost of debt = 8.98%

b) To find the cost of equity:

Given Weight of Debt (Wd) = 0.2593, Weight of Equity (We) = 0.7407

After-tax cost of debt (rd) = 5.5%

WACC = 12%

Cost of equity = [WACC - (Wd * rd)] / We

Cost of equity = 12% - (0.2593 * 5.5%) / 0.7407

Cost of equity = 14.28%

WACC is a crucial financial metric that represents the average rate a company expects to pay to finance its assets. It provides insights into the company's overall cost of capital and helps determine the minimum rate of return required by investors.