Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 11, Problem 1P

After-Tax Cost of Debt

Calculate the after-tax cost of debt under each of the following conditions:

  1. a. rd of 13%, tax rate of 0%
  2. b. rd of 13%, tax rate of 20%
  3. c. rd of 13%, tax rate of 35%
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Company issuing three 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 of interest tax shield ($MM) $ Probability of Financial Distress . $0 0% $ $25 0.4 $ 0% AMOUNT OF DEBT (SMM) $60 1.1 $ $70 1.2 $ 3% 5% $50 0.9 $ 1% $80 1.4 $ 8% $90 1.6 $ 20% $100 1.8 33% If in the event of distress, the present value of distress costs is equal to $15 million, then the optimal level of debt for company: A. $25 million B. $50 million C. $60 million D. $70 million
David Co has in issue 4% irredeemable debt quoted at $155 (ex-interest). The corporation tax rate is 35%.Required:-Calculate the return required by the debt providers and the cost ofdebt to David Co.
The debt is amortized by the periodic payment shown. Compute​ (a) the number of payments required to amortize the​ debt; (b) the outstanding principal at the time indicated. Debt Principal Debt Payment Payment Interval Interest Rate Conversion Period Outstanding Principal ​ After:   ​$13,000 ​$1,493 6 months 6​% monthly 8th payment
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