Your firm is considering issuing one-year debt and has come up with the followingestimates of the value of the interest tax shield and the probability of distress fordifferent levels of debt:PV (interest tax shield, in $ million)0$80 million$90 million$50 million$2 million0.010.00%100.700.00%Debt Level (in $ million)30500.901.00%1.152.00%701.307.00%901.5016.00%1101.70Probability of Financial DistressSuppose the firm has a beta of zero, so that the appropriate discount rate forfinancial distress costs is the risk-free rate of 5%. Which level of debt above isoptimal if, in the event of distress, the firm will have distress costs equal to $2million?31.00%

Variables in the question: Debt Level (in $ million)01030507090110PV (Interest tax shield, $…

Your firm is considering issuing one-year debt and has come up with the following estimates of the value of the interest tax shield and the probability of distress for different levels of debt: PV (interest tax shield, in $ million) Probability of Financial Distress 0 $80 million $90 million $50 million $2 million 0.01 0.00% 10 0.70 0.00% Debt Level (in $ million) 30 50 70 0.90 1.00% 1.15 2.00% 1.30 7.00% 90 1.50 16.00% 110 1.70 31.00% Suppose the firm has a beta of zero, so that the appropriate discount rate for financial distress costs is the risk-free rate of 5%. Which level of debt above is optimal if, in the event of distress, the firm will have distress costs equal to $2 million?

Your firm is considering issuing one-year debt and has come up with the following estimates of the value of the interest tax shield and the probability of distress for different levels of debt: PV (interest tax shield, in $ million) Probability of Financial Distress 0 $80 million $90 million $50 million $2 million 0.01 0.00% 10 0.70 0.00% Debt Level (in $ million) 30 50 70 0.90 1.00% 1.15 2.00% 1.30 7.00% 90 1.50 16.00% 110 1.70 31.00% Suppose the firm has a beta of zero, so that the appropriate discount rate for financial distress costs is the risk-free rate of 5%. Which level of debt above is optimal if, in the event of distress, the firm will have distress costs equal to $2 million?

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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Many companies look to re-finance their outstanding debt when interest rates fall significantly. Javert Toy Company has $50.00 million in debt outstanding that pays an 8.75% APR coupon. The debt has an average maturity of 10.00 years. The firm can refinance at an annual rate of 5.25%. That is, investors want 5.25% today for bonds of similar risk and maturity. How much will Javert save on interest payments with this re-finance? You can assume that Javert will issue debt to cover the full price of repurchasing the old debt from part A. (answer in terms of millions, so 1,000,000 would be 1.00) Submit Answer format: Currency: Round to: 4 decimal places.
The company you work for wants you to estimate the company’s WACC; but before you do so, you need to estimate the cost of debt and equity. You have obtained the following info. 1) the firms non-callable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000 and a market price of $1,225.00. 2) thecompany’s tax rate is 40%. 3) the risk-free rate is 4.50%, the market risk premium 5.50%, and the stocks betta is 1.20. 4) the target capital structure consists of 35% debt and the balance common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. Calculate the company’s cost of retained earnings using the CAPM approach.
PDQ, Inc. expects EBIT to be approximately $12.2 million per year for the foreseeable future, and it has 100,000 20-year, 6 percent annual coupon bonds outstanding. (Use Table 11.1.)What would the appropriate tax rate be for use in the calculation of the debt component of PDQ’s WACC? (Round your answer to 2 decimal places.)
14
Suppose your company needs to raise $36.9 million and you want to issue 24-year bonds for this purpose. Assume the required return on your bond issue will be 9.4 percent, and you’re evaluating two issue alternatives: a 9.4 percent semiannual coupon bond and a zero coupon bond. Your company’s tax rate is 35 percent. Both bonds would have a face value of $1,000. Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the firm’s aftertax cash outflows for the first year under the two different scenarios.
The company you work for wants you to estimate the company’s WACC; but before you do so, you need to estimate the cost of debt and equity. You have obtained the following info. 1) the firms non-callable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000 and a market price of $1,225.00. 2) the company’s tax rate is 40%. 3)the risk-free rate is 4.50%, the market risk premium is 5.50%, and the stocks beta is 1.20. 4) the target capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity, and it does not expect to issue any common stock. WHAT is the WACC?
Please answer ASAP
What would be the solution to the image attached?
You are analyzing the after-tax cost of debt for a firm. You know that the firm’s 12-year maturity, 13.00 percent semiannual coupon bonds are selling at a price of $1,207. These bonds are the only debt outstanding for the firm. What is the current YTM of the bonds? (to 2 decimal places) What is the after-tax cost of debt for this firm if it has a marginal tax rate of 34 percent? What is the current YTM of the bonds and after-tax cost of debt for this firm if the bonds are selling at par? (round final answer to 2 decimal places) YTM __% After-tax cost of debt ___%

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