Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 14, Problem 7QP
Calculating Cost of Debt [LO2] Jiminy’s Cricket Farm issued a 30-year, 7 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The company’s tax rate is 35 percent.
a. What is the pretax cost of debt?
b. What is the aftertax cost of debt?
c. Which is more relevant, the pretax or the aftertax cost of debt? Why?
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M7
If the cost of debt after tax for Sohar Textiles is 0.156 and its tax rate is 0.233 then what is the cost of debt?
Select one:
a. 0.1923
b. None of the options
c. 0.2034
d. 0.1265
e. 0,1197
Solve it using formulas, no tables
correct answers are:
i) i^2=0.063977 > 0.0536
iii) Po= £91,630.9
iv) i' 0.028985 = 2.9% pa
A company that pays tax at the rate of 25% on income and 30% on capital gains is
considering purchasing a bond at a price that would ensure a net redemption yield of at least
6.5% per annum.
A bond of nominal value £100,000 which pays half-yearly coupons of 7.5% per annum in
arrears is available. It is redeemable at 105% at the option of the borrower on any coupon
payment date between 15 and 20 years (inclusive) after the date of purchase.
(i) Determine whether or not the company would make a capital gain if the bond is
purchased and is held until redemption.
(ii) Explain how your answer to part (i) influences the assumptions made in calculating the
maximum price that the company should pay for the bond for the given target net
redemption yield.
(iii) Calculate the maximum price that the investor should pay.
(iv) The annual rate of inflation expected by the…
Chapter 14 Solutions
Fundamentals of Corporate Finance
Ch. 14.1 - What is the primary determinant of the cost of...Ch. 14.1 - What is the relationship between the required...Ch. 14.2 - What do we mean when we say that a corporations...Ch. 14.2 - Prob. 14.2BCQCh. 14.3 - Why is the coupon rate a bad estimate of a firms...Ch. 14.3 - How can the cost of debt be calculated?Ch. 14.3 - How can the cost of preferred stock be calculated?Ch. 14.4 - Prob. 14.4ACQCh. 14.4 - Prob. 14.4BCQCh. 14.4 - Under what conditions is it correct to use the...
Ch. 14.5 - Prob. 14.5ACQCh. 14.5 - Prob. 14.5BCQCh. 14.6 - Prob. 14.6ACQCh. 14.6 - Why do you think we might prefer to use a ratio...Ch. 14.7 - What are flotation costs?Ch. 14.7 - How are flotation costs included in an NPV...Ch. 14 - A firm has paid dividends of 1.02, 1.10, 1.25, and...Ch. 14 - Prob. 14.3CTFCh. 14 - Why is the tax rate applied to the cost of debt...Ch. 14 - What approach to a projects costs of capital...Ch. 14 - What is the flotation cost of equity for a firm...Ch. 14 - WACC [LO3] On the most basic level, if a firms...Ch. 14 - Book Values versus Market Values [LO3] In...Ch. 14 - Project Risk [LO5] If you can borrow all the money...Ch. 14 - Prob. 4CRCTCh. 14 - DCF Cost of Equity Estimation [LO1] What are the...Ch. 14 - SML Cost of Equity Estimation [LO1] What are the...Ch. 14 - Prob. 7CRCTCh. 14 - Cost of Capital [LO5] Suppose Tom OBedlam,...Ch. 14 - Company Risk versus Project Risk [LO5] Both Dow...Ch. 14 - Divisional Cost of Capital [LO5] Under what...Ch. 14 - Calculating Cost of Equity [LO1] The Absolute Zero...Ch. 14 - Calculating Cost of Equity [LO1] The Graber...Ch. 14 - Calculating Cost of Equity [LO1] Stock in Daenerys...Ch. 14 - Estimating the DCF Growth Rate [LO1] Suppose...Ch. 14 - Prob. 5QPCh. 14 - Calculating Cost of Debt [LO2] Drogo, Inc., is...Ch. 14 - Calculating Cost of Debt [LO2] Jiminys Cricket...Ch. 14 - Prob. 8QPCh. 14 - Calculating WACC [LO3] Mullineaux Corporation has...Ch. 14 - Taxes and WACC [LO3] Lannister Manufacturing has a...Ch. 14 - Finding the Target Capital Structure [LO3] Famas...Ch. 14 - Book Value versus Market Value [LO3] Dinklage...Ch. 14 - Calculating the WACC [LO3] In Problem 12, suppose...Ch. 14 - WACC [LO3] Fyre, Inc., has a target debtequity...Ch. 14 - Prob. 15QPCh. 14 - Prob. 16QPCh. 14 - SML and WACC [LO1] An all-equity firm is...Ch. 14 - Calculating Flotation Costs [LO4] Suppose your...Ch. 14 - Calculating Flotation Costs [LO4] Caughlin Company...Ch. 14 - WACC and NPV [LO3, 5] Scanlin, Inc., is...Ch. 14 - Flotation Costs [LO4] Pardon Me, Inc., recently...Ch. 14 - Calculating the Cost of Debt [LO2] Ying Import has...Ch. 14 - Calculating the Cost of Equity [LO1] Epley...Ch. 14 - Adjusted Cash Flow from Assets [LO3] Ward Corp. is...Ch. 14 - Adjusted Cash Flow from Assets [LO3] In the...Ch. 14 - Prob. 26QPCh. 14 - Prob. 27QPCh. 14 - Flotation Costs and NPV [LO3, 4] Photochronograph...Ch. 14 - Flotation Costs [LO4] Sheaves Corp. has a...Ch. 14 - Project Evaluation [LO3, 4] This is a...Ch. 14 - Prob. 31QPCh. 14 - Prob. 1MCh. 14 - Cost of Capital for Swan Motors You have recently...Ch. 14 - Prob. 3MCh. 14 - Cost of Capital for Swan Motors You have recently...Ch. 14 - Cost of Capital for Swan Motors You have recently...
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- H5. Show proper step by step calculationarrow_forward17. DETAILS HARMATHAP12 6.5.017. MY NOTES The problem describes a debt to be amortized. (Round your answers to the nearest cent.) A man buys a house for $350,000. He makes a $150,000 down payment and amortizes the rest of the purchase price with semiannual payments over the next 8 years. The interest rate on the debt is 11%, compounded semiannually. (a) Find the size of each payment. $ (b) Find the total amount paid for the purchase. 2$ (c) Find the total interest paid over the life of the loan. 2$ 3:06 AM P Type here to search 6回 中 12/5/2020arrow_forward17. Moving from a Fixed-Rate loan to an Adjustable Rate loan transfers interest rate exposure from the lender to the borrower? a) True b) False 18. 13 years ago a household took out a 20 year Interest Only $350,000 loan at a fixed-rate of 3.85%. How much is the outstanding principal on the loan? a) $235,491.43 b) $173,167.38 c) $350,000.00 d) $121,467.84arrow_forward
- 4. Chapter MC, Section .03, Problem 106 A 7-year municipal bond yields 4.80%. Your marginal tax rate (including state and federal taxes) is 32.00%. What interest rate on a 7-year corporate bond of equal risk would provide you with the same after-tax return? (Round your final answer to two decimal places.) Oa. 7.06% Ob. 3.64% OC. 6.34% d. 3.26% e. 15.00% Save & Continue Continue without savingarrow_forwardIf the cost of debt after tax for Sohar Textiles is 0.17 and its tax rate is 0.219 then what is the cost of debt? Select one: a. None of the options b. 0.2072 c. 0.2177 d. 0.1328 e. 0.1395arrow_forwardMansukharrow_forward
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