A company has $5 million in debt outstanding with a coupon rate of 12%. Currently, the yield to maturity (YTM) on these bonds is 14%. If the firm's tax rate is 40%, what is the company's after-tax cost of debt? О А. 7.2% О В. 8.4% О С. 8.6% D. 10.8%

A company has $5 million in debt outstanding with a coupon rate of 12%. Currently, the yield to maturity (YTM) on these bonds is 14%. If the firm's tax rate is 40%, what is the company's after-tax cost of debt? О А. 7.2% О В. 8.4% О С. 8.6% D. 10.8%

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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8. Use the following information:Debt: $79,000,000 book value outstanding. The debt is trading at 94% of book value. Theyield to maturity is 7%.Equity: 2,900,000 shares selling at $46 per share. Assume the expected rate of return onFederate d’s stock is 16%.Taxes: Federate d’s marginal tax rate is Tc = 0.21.Suppose Federated Junkyards decides to move to a more conservative debt policy. A yearlater, its debt ratio is down to 14.00% (D/V = 0.1400). The interest rate has dropped to6.6%. The company’s business risk, opportunity cost of capital, and tax rate have notchanged. Use the three-step procedure to calculate Federate d’s WACC under these newassumptions.
A firm has 4000m in balance sheet debt (book value is equal to market value in this case) and 1000m in capitalized leases. Market value of equity is 10000m. You can use book value of debt to approximate its market value. If you were to use this information in the calculation of WACC, what is Wd? O 40.00% O 28.57% O 33.33% O 50.00%
Calculate the cost of capital for a bond whose yield to maturity is 10% and the firm's tax rate of 34% a. 34% b. 10% c. 11% d. 6.6%
5. SIROM Scientific Solutions has £12 million of outstanding equity and £4 million of bank debt. The bank debt costs 4% per year. The estimated equity beta is 1. If the market risk premium is 8% and the risk-free rate is 4%, calculate the weighted average cost of capital if the firm's tax rate is 30%. A. 8.73% B. 9.22% C. 9.70% D. 10.67%
Here is Icknield’s market-value balance sheet (figures in $ millions): Net working capital $550 Debt $800 long term assets $2,150 Equity $1,900 value of firm $2,700 $2,700 The debt is yielding 7%, and the cost of equity is 14%. The tax rate is 21%. Investors expect this level of debt to be permanent. a. What is Icknield’s WACC? b. How would the market-value balance sheet change if Icknield retired all its debt?
The outstanding debt of Berstin Corp. has ten years to maturity, a current yield of 6%, and a price of $80. What is the pretax cost of debt if the tax rate is 30%. Note: The current yield of a bond is its annual coupon divided by its price. A. 4.65% B. 6% OC. 6.2% OD. 7.75%
(Individual or component costs of capital) Compute the cost of capital for the firm for the following: a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.5 percent. Interest payments are $52.50 and are paid semiannually. The bonds have a current market value of $1,121 and will mature in 10 years. The firm's marginal tax rate is 34 percet. b. A new common stock issue that paid a $1.84 dividend last year. The firm's dividends are expected to continue to grow at 6.4 percent per year, forever. The price of the firm's common stock is now $27.92. c. A preferred stock that sells for $134, pays a dividend of 9.1 percent, and has a $100 par value. d. A bond selling to yield 11.7 percent where the firm's tax rate is 34 percent. a. The after-tax cost of debt is %. (Round to two decimal places.)
K SIROM Scientific Solutions has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 8% and the risk-free rate is 5%, compute the weighted average cost of capital if the firm's tax rate is 30%. OA. 15.17% OB. 17.44% O C. 15.93% OD. 16.68% ...
The firm can raise an unlimited amount of debt by selling R1,000 par value, 8% coupon interest rate, 20 year bonds on which annual interest payments will be made. To sell the issue, an average discount of R50 per bond would have to be given. The firm also must pay flotation costs of R50 per bond. Firm is in 40% tax bracket. Determine after tax cost of debt. A. 5.86% B. 5.48% C. 5.46% D. 5.55%
(Individual or component costs of capital) Compute the cost of capital for the firm for the following: a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.1 percent. Interest payments are $50.50 and are paid semiannually. The bonds have a current market value of $1,122 and will mature in 10 years. The firm's marginal tax rate is 34 percet. b. A new common stock issue that paid a $1.85 dividend last year. The firm's dividends are expected to continue to grow at 7.8 percent per year, forever. The price of the firm's common stock is now $27.25. c. A preferred stock that sells for $150, pays a dividend of 8.8 percent, and has a $100 par value. d. A bond selling to yield 11.8 percent where the firm's tax rate is 34 percent. a. The after-tax cost of debt is %. (Round to two decimal places.)
K The outstanding debt of Berstin Corp. has eight years to maturity, a current yield of 9%, and a price of $80. What is the pretax cost of debt if the tax rate is 30%. A. 7.5% B. 10.8 % OC. 6.5 % OD. more information needed
K SIROM Scientific Solutions has $4 million of outstanding equity and $12 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 1. If the market risk premium is 9% and the risk - free rate is 4%, compute the weighted average cost of capital if the firm's tax rate is 25%. OA. 6.71% OB. 5.8% C. 5.49% D. 6.1%

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