Holmes electronics has 800,000 shares of common stock outstanding with a par value of £1.00 per share. The current share price is £12.50 per share. The firm has outstanding debt with a par value of £4 million, which is selling at 150% of par. The risk-free rate of interest is 6% and the required return on the firm’s debt is 12%. The risk premium on the market is 14% and the firm has an equity beta of 1.3. Where a tax rate is required in the questions below, assume that debt interest payments are tax deductible. 18) What is Holmes’ cost of debt capital (i) if there are no taxes and (ii) if there is a corporation tax rate of 35%? a. (i) 12% and (ii) 7.8% b. (i) 12% and (ii) 8.6% c. (i) 6% and (ii) 4.3% d. (i) 6% and (ii) 3.9% e. None of the above
Holmes electronics has 800,000 shares of common stock outstanding with a par value of £1.00 per share. The current share price is £12.50 per share. The firm has outstanding debt with a par value of £4 million, which is selling at 150% of par. The risk-free rate of interest is 6% and the required return on the firm’s debt is 12%. The risk premium on the market is 14% and the firm has an equity beta of 1.3. Where a tax rate is required in the questions below, assume that debt interest payments are tax deductible. 18) What is Holmes’ cost of debt capital (i) if there are no taxes and (ii) if there is a corporation tax rate of 35%? a. (i) 12% and (ii) 7.8% b. (i) 12% and (ii) 8.6% c. (i) 6% and (ii) 4.3% d. (i) 6% and (ii) 3.9% e. None of the above
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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Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
Use the following information to answer questions 18-20
Holmes electronics has 800,000 shares of common stock outstanding with a par value of £1.00 per
share. The current share price is £12.50 per share. The firm has outstanding debt with a par value of
£4 million, which is selling at 150% of par. The risk-free rate of interest is 6% and the required return
on the firm’s debt is 12%. The risk premium on the market is 14% and the firm has an equity beta of
1.3.
Where a tax rate is required in the questions below, assume that debt interest payments are tax
deductible.
18) What is Holmes’ cost of debt capital (i) if there are no taxes and (ii) if there is a corporation tax
rate of 35%?
a. (i) 12% and (ii) 7.8%
b. (i) 12% and (ii) 8.6%
c. (i) 6% and (ii) 4.3%
d. (i) 6% and (ii) 3.9%
e. None of the above
19) What is Holmes’ cost of equity capital (i) if there are no taxes and (ii) if there is a corporation
tax rate of 35%?
a. (i) 20.6% and (ii) 18%
b. (i) 20.6% and (ii) 20.6%
c. (i) 24.2% and (ii) 19.8%
d. (i) 24.2% and (ii) 24.2%
e. None of the above
20) What is Holmes’ WACC (i) if there are no taxes and (ii) if there is a corporation tax rate of 35%?
a. (i) 18.45% and (ii) 18.05%
b. (i) 18.45% and (ii) 16.825%
c. (i) 19.625% and (ii) 16.825%
d. (i) 19.625% and (ii) 18.05%
e. None of the above
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