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Cost of debt the promised rate of return

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XiGo ?nances by both debt and equity. Its debt sells at the price 100, and the face value is 108. However, XiGo may default with probability 0.1, in which case it will pay back its debt holder 98.

(a) What is XiGo's cost of debt? [Hint: is XiGo's cost of debt the promised rate of return or the expected rate of return to the debt holder?]

(b) Suppose that XiGo's cost of equity is 11%. If it ?nances half of its funds by debt and half of its funds by equity, what is XiGo's WACC?

Reference no: EM131725594

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