Colossus Company has the ability to obtain debt financing at 10 percent. It currently has $2,000,000 in debt outstanding and is considering taking on more to fund a major expansion. It has a marginal income rate of 25 percent. US Treasury bonds are currently yielding 2.0 percent. What is the firm's after-tax cost of debt?

Colossus Company has the ability to obtain debt financing at 10 percent. It currently has $2,000,000 in debt outstanding and is considering taking on more to fund a major expansion. It has a marginal income rate of 25 percent. US Treasury bonds are currently yielding 2.0 percent. What is the firm's after-tax cost of debt?

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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Jenkins, Inc., has equity with a market value of $22.6 million and debt with a market value of $11.3 million. The cost of debt is 8 percent per year. Treasury bills that mature in one year yield 4 percent per year, and the expected return on the market portfolio over the next year is 10 percent. The beta of the company's equity is 1.11. The firm pays no taxes. a. What is the company's debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the cost of capital for an otherwise identical all-equity firm? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Debt-equity ratio b. Weighted average cost of capital C. Cost of capital 0.50 % %
Fowler, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 25 percent lower. The firm is considering a debt issue of $60,000 with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock. There are currently 10,000 shares outstanding. The firm has a tax rate 25 percent. Assume the stock price is constant under all scenarios. a-1. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in EPS when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate…
BHP Billiton, an Australian company, just paid $0.85 as a dividend, which is expected to grow at 5.0 per cent. Its most recent stock price is $72. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 60 per cent of face value. The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 22 per cent corporate tax rate. This year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. Therefore, you expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 20 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely. Answer the…
Sandyhorse Corp. has $370 million of debt outstanding at an interest rate of 14 percent. What is the present value of the interest tax shield if the debt has no maturity and if Sandyhorse is subject to a 30 percent marginal tax rate? $_________
AT&T is a profitable company. On its $200 Billion of debt, it pays an interest rate of 5%. Assuming its tax rate is 20%, what is its effective cost of debt? a) 15% b) 6% c) 5% d) 4%
XYZ borrows $800 million at an interest rate of 7.6%. Prior to this borrowing, it was an all-equity firm. It expects to maintain this debt level indefinitely. XYZ pays taxes at an effective rate of 37%. By how is the market value of XYZ expected to change because of the borrowing? [Hint: Tax shield?]
You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 13.00 percent semiannual coupon bonds are selling at a price of $1,207. These bonds are the only debt outstanding for the firm. What is the current YTM of the bonds? (to 2 decimal places) What is the after-tax cost of debt for this firm if it has a marginal tax rate of 34 percent? What is the current YTM of the bonds and after-tax cost of debt for this firm if the bonds are selling at par? (round final answer to 2 decimal places) YTM __% After-tax cost of debt ___%
Fujita, Incorporated, has no debt outstanding and a total market value of $422,400. Earnings before interest and taxes, EBIT, are projected to be $55,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT will be 20 percent lower. The company is considering a $205,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,800 shares outstanding. Ignore taxes for questions (a) and (b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. a-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be…

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