Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition)
Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition)
14th Edition
ISBN: 9780133740912
Author: Lawrence J. Gitman, Chad J. Zutter
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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Chapter 9 Solutions

Principles of Managerial Finance, Student Value Edition Plus NEW MyLab Finance with Pearson eText -- Access Card Package (14th Edition)

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