For questions 37 – 40 use the following: Starlight Corporation has accounts payable of $200,000 (a typical amount for the company, non-interest bearing), a bank loan of $300,000 at 8% interest rate, a bank loan of $500,000 at 7% interest rate, and equity of $1,400,000. Its income tax rate is 31%. Management estimates the company’s cost of equity is 14%. A. What is the company’s after-tax cost for each of its two bank loans?
For questions 37 – 40 use the following: Starlight Corporation has accounts payable of $200,000 (a typical amount for the company, non-interest bearing), a bank loan of $300,000 at 8% interest rate, a bank loan of $500,000 at 7% interest rate, and equity of $1,400,000. Its income tax rate is 31%. Management estimates the company’s cost of equity is 14%. A. What is the company’s after-tax cost for each of its two bank loans?
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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For questions 37 – 40 use the following: Starlight Corporation has accounts payable of $200,000 (a typical amount for the company, non-interest bearing), a bank loan of $300,000 at 8% interest rate, a bank loan of $500,000 at 7% interest rate, and equity of $1,400,000. Its income tax rate is 31%. Management estimates the company’s
A. What is the company’s after-tax cost for each of its two bank loans?
a. 6%
b. 4%
c. 7.5%
d. 5%
B. What is the company’s weighted average cost of capital on interest-bearing debt and equity?
a. 12%
b. 9%
c. 14%
d. 11%
C. What is the company’s weighted average cost of capital on non-interest-bearing debt, interest bearing debt, and equity (or total invest capital)?
a. 9%
b. 10%
c. 12%
d. 8%
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