The target capital structure of Company A, Inc. consists of 35% debt and 65% equity. Company A is considered a low-risk firm with a beta of 0.75. The market risk premium is 6.00%. Company A’s current share price is $70 and the most recent dividend was $3.10. The market expects dividends to grow at 3.00% for the foreseeable future. Company A's only outstanding bond issue has 10 years to maturity, pays semi-annual coupons at 5.00%, has a yield-to-maturity of 5.66%, and sells for 95.00% of par. Government bonds are yielding 3.00%. Company A's tax rate is 35%. What is Company A’s after-tax cost of debt?
The target capital structure of Company A, Inc. consists of 35% debt and 65% equity. Company A is considered a low-risk firm with a beta of 0.75. The market risk premium is 6.00%. Company A’s current share price is $70 and the most recent dividend was $3.10. The market expects dividends to grow at 3.00% for the foreseeable future. Company A's only outstanding bond issue has 10 years to maturity, pays semi-annual coupons at 5.00%, has a yield-to-maturity of 5.66%, and sells for 95.00% of par. Government bonds are yielding 3.00%. Company A's tax rate is 35%. What is Company A’s 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
Related questions
Question
The target capital structure of Company A, Inc. consists of 35% debt and 65% equity. Company A is considered a low-risk firm with a beta of 0.75. The market risk premium is 6.00%. Company A’s current share price is $70 and the most recent dividend was $3.10. The market expects dividends to grow at 3.00% for the foreseeable future. Company A's only outstanding bond issue has 10 years to maturity, pays semi-annual coupons at 5.00%, has a yield-to-maturity of 5.66%, and sells for 95.00% of par. Government bonds are yielding 3.00%. Company A's tax rate is 35%.
What is Company A’s after-tax cost of debt?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education