Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and an 8% coupon, semiannual payment ($40 payment every 6 months). The bonds currently sell for $822.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt? Do not round intermediate calculations. Round your answer to two decimal places.
Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and an 8% coupon, semiannual payment ($40 payment every 6 months). The bonds currently sell for $822.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt? Do not round intermediate calculations. Round your answer to two decimal places.
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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Transcribed Image Text:3. Cost of Debt
A firm's before-tax cost of debt, rd, is the interest rate that the firm must pay on
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debt. Because interest is tax deductible, the relevant cost of -Select-
debt used to calculate a firm's
WACC is the
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C cost of debt, ra(1 – T). The
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cost of debt is used in calculating the WACC because we are interested in maximizing the value of the firm's stock, and the stock price
depends on
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O cash flows. It is important to emphasize that the cost of debt is the interest rate on
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e debt, not
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* debt because our primary concern with the cost of
capital is its use in capital budgeting decisions. The rate at which the firm has borrowed in the past is
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because we need to know the cost of
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O capital. For these reasons, the
on outstanding debt (which reflects current market conditions) is a better measure of the cost of debt than the
The
on the company's
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-Select-
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-term debt is generally used to calculate the cost of debt because, more often than not, the capital is being raised to fund
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-term projects.
Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and an 8% coupon, semiannual payment ($40 payment every 6 months). The
bonds currently sell for $822.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt? Do not round intermediate calculations. Round your answer to two decimal places.
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