Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
Question
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Chapter 9, Problem 9.4P

a.

Summary Introduction

To discuss:

To calculate the before-tax and after –tax cost of debt using approximation formula.

Introduction:

The before -tax cost debt is the rate of return the firm must pay on a new borrowing. The after-tax cost of a debt is the cost after deducting the tax amount.

When after tax cost of the debt is ri and rd is the before-tax cost of a debt, with the tax rate of the firm T, before-tax cost can be converted to after -tax cost by using the following equation,

ri=rd×(1T)

Using the approximation the before-tax cost of the debt is calculated when the annual interest payment in dollars (I), the net proceeds from the sale of a bond (Nd) and term of the bond in years (n) , using the equation,

rd=(I+([($1,000Nd)]n))((Nd+$1,000)2)

b.

Summary Introduction

To discuss:

Comparison between the two approaches.

Introduction:

The before -tax cost debt is the rate of return the firm must pay on a new borrowing. The after-tax cost of a debt is the cost after deducting the tax amount.

When after tax cost of the debt is ri and rd is the before-tax cost of a debt, with the tax rate of the firm T, before-tax cost can be converted to after -tax cost by using the following equation,

ri=rd×(1T)

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Compute bond proceeds, amortizing premium by interest method, and interest expense DATA Face amount of bonds Contract rate of interest Term of bonds, years Market rate of interest Interest payment REQUIRED: a. Compute the amount of cash proceeds from the sale of the bonds. $41,000,000 11% 3 9% Semiannual b. Compute the amount of premium to be amortized for the first semiannual interest payment period, using the interest method. c. Compute the amount of premium to be amortized for the second semiannual interest payment period, using the interest method. d. Compute the amount of the bond interest expense for the first year. Using formulas and cell references from the problem data, perform the required analysis. Formulas entered in the green cells show in the orange cells. Transfer amounts to CNOWv2 for grading. a. PV of cash proceeds b. Premium amortized for the 1st interest payment period c. Premium amortized for the 2nd interest payment period d. Interest expense for the 1st year…
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Chapter 9 Solutions

Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)

Ch. 9.4 - Why is the cost of financing a project with...Ch. 9.5 - Prob. 9.13RQCh. 9.5 - Prob. 9.14RQCh. 9.5 - Prob. 9.15RQCh. 9 - In the chapter opener you learned that Johnson ...Ch. 9 - Learning Goals 3, 4, 5, 6 ST9-1 Individual...Ch. 9 - Prob. 9.1WUECh. 9 - Prob. 9.2WUECh. 9 - Duke Energy has been paying dividends steadily for...Ch. 9 - Weekend Warriors Inc. has 35% debt and 65% equity...Ch. 9 - Oxy Corporation uses debt, preferred stock, and...Ch. 9 - Concept of cost of capital and WACC Mace...Ch. 9 - Prob. 9.2PCh. 9 - Before-tax cost of debt and after-tax cost of debt...Ch. 9 - Prob. 9.4PCh. 9 - The cost of debt Gronseth Drywall Systems Inc. is...Ch. 9 - After-tax cost of debt Bella Wans is interested in...Ch. 9 - Cost of preferred stock Taylor Systems has just...Ch. 9 - Cost of preferred stock Determine the cost for...Ch. 9 - Cost of common stock equity: CAPM Netflix common...Ch. 9 - Retained earnings versus new common stock Using...Ch. 9 - The effect of tax rate on WACC K. Bell Jewelers...Ch. 9 - WACC: Market value weights The market values and...Ch. 9 - WACC: Book weights and market weights Webster...Ch. 9 - WACC and target weights After careful analysis,...Ch. 9 - Cost of capital Edna Recording Studios Inc....Ch. 9 - Calculation of individual costs and WACC Dillon...Ch. 9 - Prob. 9.18PCh. 9 - Calculation of individual costs and WACC Lang...Ch. 9 - Weighted average cost of capital (WACC) American...Ch. 9 - Prob. 9.21PCh. 9 - Eco Plastics Company Since its inception, Eco...
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