Answered: XYZ Corporation, which is in the 30%…

XYZ Corporation, which is in the 30% tax bracket, must pay $3,500,000 in annual interest to its bondholders. Calculate the after-tax cost to the corporation.

Financial Accounting

15th Edition

ISBN:9781337272124

Author:Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:Carl Warren, James M. Reeve, Jonathan Duchac

Chapter14: Long-term Liabilities: Bonds And Notes

Section: Chapter Questions

Problem 1PEB: Brower Co. is considering the following alternative financing plans: Income tax is estimated at 40%...

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Corporation X needs $1,000,000 and can raise this through debt at an annual rate of 6 percent, or preferred stock at an annual cost of 8 percent. If the corporation has a 21 percent tax rate, the after-tax cost of each is ________.
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2) To calculate the after-tax cost of debt, multiply the before-tax cost of debt by ------ . Water and Power Company (WPC) can borrow funds at an interest rate of 9.70% for a period of four years. Its marginal federal-plus-state tax rate is 40%. WPC’s after-tax cost of debt is (rounded to two decimal places). At the present time, Water and Power Company (WPC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,092.79 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 40%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 4.57% 5.14% 5.71% 6.57%
Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 11 percent while its cost of equity is 15 percent. Assume the appropriate weighted-average tax rate is 21 percent and JB estimates that they can make full use of the interest tax shield.What will be JB’s WACC? (Round your answer to 2 decimal places.)
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The (AFTER-TAX COST OF DEBT / BEFORE-TAX COST OF DEBT) is the interest rate that a firm pays on any new debt financing. Omni Consumer Products Company (OCP) can borrow funds at an interest rate of 9.70% for a period of eight years. Its marginal federal-plus-state tax rate is 30%. OCP’s after-tax cost of debt is (7.81 / 6.79 / 9.70 / 6.45) (rounded to two decimal places). At the present time, Omni Consumer Products Company (OCP) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,229.24 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 30%. If OCP wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? _____
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