Palmer Company has $5,000,000 of 15-year maturity bondsoutstanding. Each bond has a maturity value of $1,000, anannual coupon of 12.0%. The bonds can be called at anytime with a premium of $50 per bond. If the bonds arecalled, the company must pay flotation costs of $10 per newrefunding bond. Ignore tax considerations-assume that thefirm's tax rate is zero.The company's decision of whether to call the bondsdepends critically on the current interest rate on newlyissued bonds. What is the breakeven interest rate, the ratebelow which it would be profitable to call in the bonds?A) 9.57%B) 10.07%C) 10.60%D) 11.16%E) 11.72%

Internal rate of return refers to the minimum return to be earned by the investors in estimating the…

Answered: Palmer Company has $5,000,000 of…

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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Jones Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%. a. What is the pre-taxed cost of debt? b. What is the after tax cost of debt? c. Which is more relevant, the pre-tax or the after- tax cost of debt? Why?
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Badger Corp. has an issue of 6% bonds outstanding with 6 months left to maturity. The bonds are currently priced at $1,008.11, and pay interest semiannually. The firm's marginal tax rate is 40%. The estimated risk premium between the company's stock and bond returns is 5%. The firm's expects to maintain a capital structure with 40% debt and 60% equity going forward. The company's W.A.C.C. is %. Margin of error for correct responses: +/-.10(%) Rounding and Formatting instructions: Do not enter dollar signs, percent signs, commas, X, or any words in your response. Do not round any intermediate work, but round your "final response to 2 decimal places (example: if your answer is 12.3456, 12.3456%, or $12.3456, you should enter 12.35).
Jones Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%.i) a. What is the pre-taxed cost of debt? b. What is the after tax cost of debt? c. Which is more relevant, the pre-tax or the after- tax cost of debt? Why? ii) In question above, suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sell for 57 percent of par.a. What is the company’s total book value of debt?b. The total market value?c. What is your best estimate of the after-tax cost of debt now?
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Jones Cricket Institute issued a 30-year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%. a. What is the pre-taxed cost of debt? b. What is the after-tax cost of debt? c. Which is more relevant, the pre-tax or the after- tax cost of debt? Why? In the question above, suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sell for 57 percent of par. a. What is the company’s total book value of debt? b. The total market value? c. What is your best estimate of the after-tax cost of debt now?
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