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Mentone Global Corporation (MGC) is attempting to evaluate two alternative capital structures – X and Y. The following table shows the two structures along with relevant cost data. The company is subject to a 35% tax rate. The risk-free rate is 4% and the market return is currently 9%.

Mentone Global Corporation (MGC) is attempting to evaluate two alternative capital structures – X and Y. The following table shows the two structures along with relevant cost data. The company is subject to a 35% tax rate. The risk-free rate is 4% and the market return is currently 9%.

Essentials Of Investments
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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a)  Calculate the after-tax cost of debt for each capital structure.

Mentone Global Corporation (MGC) is attempting to evaluate two alternative capital structures – X and Y. The following table shows the two structures along with relevant cost data. The company is subject to a 35% tax rate. The risk-free rate is 4% and the market return is currently 9%. Item ($Million). Debt Y 25 60 Preferred shares Ordinary shares Total capital 15 75 25 100 100 Debt (Yield to maturity) Preferred equity dividend Preferred equity (Price) Ordinary shares beta 6.50% $1.80 5.00% $18.00 0.75 1.5
Transcribed Image Text:Mentone Global Corporation (MGC) is attempting to evaluate two alternative capital structures – X and Y. The following table shows the two structures along with relevant cost data. The company is subject to a 35% tax rate. The risk-free rate is 4% and the market return is currently 9%. Item ($Million). Debt Y 25 60 Preferred shares Ordinary shares Total capital 15 75 25 100 100 Debt (Yield to maturity) Preferred equity dividend Preferred equity (Price) Ordinary shares beta 6.50% $1.80 5.00% $18.00 0.75 1.5
Expert Solution
Step 1

Given information :

Particulars X Y
Debt yield to maturity 5% 6.50%
Tax rate 35% 35%
  • .The after tax cost of debt will be the yield to maturity after deducting the tax rate. 
  • Since the question haven't mentioned anything. I will be doing the calculations on excel. 

 

 

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