The following are some financial data pertaining to Czy Corporation: Capital Structure (In Millions) Long-term debt (12% interest rate) P140 Stockholder’s Equity: Common stocks, P10 par value P40 Additional paid-in-capital 400 Retained Earnings 420 860 Total P1000 Czy Corporation’s common stock is currently selling at par. The current market return is 14% and the risk-free is 10%. The beta value for Czy Corporation is 1.20. It pays income tax at the rate of 30% of taxable income. Question: The after-tax cost of debt of Czy Corporation is? Group of answer choices 17.64% 3.84% 8.40%
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
. The following are some financial data pertaining to Czy Corporation:
Capital Structure (In Millions)
Long-term debt (12% interest rate) P140
Common stocks, P10 par value P40
Additional paid-in-capital 400
Total P1000
Czy Corporation’s common stock is currently selling at par. The current market return is 14% and the risk-free is 10%. The beta value for Czy Corporation is 1.20. It pays income tax at the rate of 30% of taxable income.
Question: The after-tax cost of debt of Czy Corporation is?
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