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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
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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3. Cost of Debt A firm's before-tax cost of debt, rd, is the interest rate that the firm must pay on -Select- debt. Because interest is tax deductible, the relevant cost of -Select- debt used to calculate a firm's WACC is the -Select- C cost of debt, ra(1 – T). The -Select- 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 -Select- O cash flows. It is important to emphasize that the cost of debt is the interest rate on -Select- e debt, not -Select- * 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 -Select- because we need to know the cost of -Select- 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 -Select- -Select- -Select- -Select- -term debt is generally used to calculate the cost of debt because, more often than not, the capital is being raised to fund -Select- -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. %
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 -Select- debt. Because interest is tax deductible, the relevant cost of -Select- debt used to calculate a firm's WACC is the -Select- C cost of debt, ra(1 – T). The -Select- 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 -Select- O cash flows. It is important to emphasize that the cost of debt is the interest rate on -Select- e debt, not -Select- * 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 -Select- because we need to know the cost of -Select- 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 -Select- -Select- -Select- -Select- -term debt is generally used to calculate the cost of debt because, more often than not, the capital is being raised to fund -Select- -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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