Micro Spinoffs, Inc., issued 20-year debt a year ago at par value with a coupon rate of 8%, paid annually. Today, the debt is selling at $1,100. If the firm's tax bracket is 20%, what is its after-tax cost of debt? (Do not round intermediate calculations. Round your answer to 2 decimal places.) After-tax cost of debt

Micro Spinoffs, Inc., issued 20-year debt a year ago at par value with a coupon rate of 8%, paid annually. Today, the debt is selling at $1,100. If the firm's tax bracket is 20%, what is its after-tax cost of debt? (Do not round intermediate calculations. Round your answer to 2 decimal places.) 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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Avicorp has a $10.9 million debt issue outstanding, with a 6.1% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 94.03% of par value. a. What is Avicorp's pretax cost of debt? b. If Avicorp faces a 25% tax rate, what is its after-tax cost of debt? Note: Assume that the firm will always be able to utilize its full interest tax shield.
K Avicorp has a $11.5 million debt issue outstanding, with a 5.8% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 93.67% of par value a. What is Avicorp's pretax cost of debt? b. If Avicorp faces a 28% tax rate, what is its after-tax cost of debt? Note Assume that the firm will always be able to utilize its full interest tax shield. BECER a. The cost of debt is % per year. (Round to two decimal places)
PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $20 million, $28 million, or $36 million. Its corporate tax rate is 38%, and investors pay a 30% tax rate on income from equity and a 35% tax rate on interest income. a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? b. What is the effective tax advantage of debt for interest expenses in excess of $36 million? (Ignore carryforwards). c. What is the expected effective tax advantage of debt for interest expenses between $20 million and $28 million? (Ignore carryforwards). d. What level of interest expense provides PMF with the greatest tax benefit?
The company you work for wants you to estimate the company’s WACC; but before you do so, you need to estimate the cost of debt and equity. You have obtained the following info. 1) the firms non-callable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000 and a market price of $1,225.00. 2) thecompany’s tax rate is 40%. 3) the risk-free rate is 4.50%, the market risk premium 5.50%, and the stocks betta is 1.20. 4) the target capital structure consists of 35% debt and the balance common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. Calculate the company’s cost of retained earnings using the CAPM approach.
Avicorp has a $10.8 million debt issue outstanding, with a 6.1% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 93.65% of par value. a. What is Avicorp's pretax cost of debt? b. If Avicorp faces a 35% tax rate, what is its after-tax cost of debt? Note: Assume that the firm will always be able to utilize its full interest tax shield. a. The cost of debt is % per year. (Round to two decimal places.)
Avicorp has a $12.3 million debt issue outstanding, with a 6.1% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 96% of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? Note: Assume that the firm will always be able to utilize its full interest tax shield.
answer quickly, Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm canborrow at 11 percent. Bruce currently has no debt, and its cost of equity is18 percent. The tax rate is 31 percent.Given the above information;a) Complete the table given below for varying levels of debt below by usinga mix of the given information and using your own computations.EBIT $100,000Cost of debt 11%Cost of equity when unlevered 18%Tax rate 31%Debt $0 $10,000 $20,000 $30,000Cost of Equity when leveredEquityD/EVuVLWACCb) Plot the results from the table into the following two graphs:i) Value of the firm vis-à-vis- Total debtii) Cost of capital of the firm vis-à-vis D/E ratio.iii) Which MM propositions have you demonstrated?
2. An overview of a firm's cost of debt To calculate the after-tax cost of debt, multiply the before-tax cost of debt by (1-T). Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 11.10% for a period of six years. Its marginal federal-plus-state tax rate is 25%. WGC's after-tax cost of debt is 8.32% (rounded to two decimal places). At the present time, Western Gas & Electric Company (WGC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,495.56 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WGC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 2.94% 2.35% 2.65% 3.38%
14
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $183,000 per year. The cost of equity is 13.1 percent and the tax rate is 21 percent. The firm can borrow perpetual debt at 6.3 percent. Currently, the firm is considering converting to a debt–equity ratio of .93. What is the firm's levered value? MM assumptions hold. A. $829,786 B. $1,215,262 C. $1,155,579 D. $997,511 E. $921,985
Jimstan & Jimstan Corp. can sell a new 10-year bond with an annual coupon of 5% and a face value of $1,000 for $1,070. The company will incur flotation costs of $40 per bond and has a tax rate of 25%. What is the company's after-tax cost of debt? (use linear allocation method.)
The company you work for wants you to estimate the company’s WACC; but before you do so, you need to estimate the cost of debt and equity. You have obtained the following info. 1) the firms non-callable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000 and a market price of $1,225.00. 2) the company’s tax rate is 40%. 3)the risk-free rate is 4.50%, the market risk premium is 5.50%, and the stocks beta is 1.20. 4) the target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any common stock. WHAT is the WACC?

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