Westbrook's Painting Co. planned to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate was 40.00%, but Congress lowered the corporate tax rate to 21.00%. By how much did the component cost of debt in the WACC change when the new tax rate was adopted? 0.57% 0.63% O 10% 1.47%
Westbrook's Painting Co. planned to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate was 40.00%, but Congress lowered the corporate tax rate to 21.00%. By how much did the component cost of debt in the WACC change when the new tax rate was adopted? 0.57% 0.63% O 10% 1.47%
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:The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below.
Assets
$ 38,000,000
101,000,000
$139,000,000
Current assets
Net plant, property, and equipment
Total assets
Liabilities and Equity
Accounts payable
$ 10,000,000
9,000,000
$ 19,000,000
40,000,000
$ 59,000,000
Accruals
Current liabilities
Long-term debt (40,000 bonds, S1,000 par value)
Total liabilities
Common stock (10,000,000 shares)
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
30,000,000
_50,000,000
_80,000,000
$139,000,000
The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%.
The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 40%.
Answer each of the Questions in the two and a half hours permitted.
Transcribed Image Text:Question 1
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Westbrook's Painting Co. planned to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate was 40.00%, but Congress lowered the corporate tax rate to 21.00%. By how much did the component cost of debt in the WACC change
when the new tax rate was adopted?
0.57%
0.63%
0.70%
1.33%
1.47%
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