Financial Management: Theory & Practice (MindTap Course List)
15th Edition
ISBN: 9781305632295
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning
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Chapter 9, Problem 9P
Summary Introduction
To determine: The firm’s post-tax component cost of debt for purposes of determining the WACC.
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Laurel, Inc., has debt outstanding with a coupon rate of 5.8% and a yield to maturity of 7.1%. Its tax rate is 35%. What is Laurel's effective (after-tax) cost of debt?
NOTE: Assume that the debt has annual coupons and that the firm will always be able to utilize its full interest tax shield.
The effective after-tax cost of debt is __ % ?
(Round to four decimal places.)
Laurel, Inc., has debt outstanding with a coupon rate of 6.1% and a yield to maturity of 7.2%. Its tax rate is 35%. What is
Laurel's effective (after-tax) cost of debt? NOTE: Assume that the debt has annual coupons.
Note: Assume that the firm will always be able to utilize its full interest tax shield.
The effective after-tax cost of debt is
%. (Round to four decimal places.)
1. An overview of a firm's cost of debt
The
is the interest rate that a firm pays on any new debt financing.
Cold Goose Metal Works (CGMW) can borrow funds at an interest rate of 7.30% for a period of five years. Its marginal federal-plus-state tax rate is
35%. CGMW's after-tax cost of debt is
(rounded to two decimal places).
At the present time, Cold Goose Metal Works (CGMW) has a series of twenty-year noncallable bonds with a face value of $1,000 that are outstanding.
These bonds have a current market price of $1,181.96 per bond, carry a coupon rate of 13%, and distribute annual coupon payments. The company
incurs a federal-plus-state tax rate of 35%. If CGMW wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt
(rounded to two decimal places)?
O8.04%
O 8.39%
O 5.59%
O 6.99%
Chapter 9 Solutions
Financial Management: Theory & Practice (MindTap Course List)
Ch. 9 - Define each of the following terms: a. Weighted...Ch. 9 - Prob. 2QCh. 9 - Prob. 3QCh. 9 - Distinguish between beta (i.e., market) risk,...Ch. 9 - Suppose a firm estimates its overall cost of...Ch. 9 - Calculate the after-tax cost of debt under each of...Ch. 9 - Prob. 2PCh. 9 - Duggins Veterinary Supplies can issue perpetual...Ch. 9 - Prob. 4PCh. 9 - Summerdahl Resorts common stock is currently...
Ch. 9 - Booher Book Stores has a beta of 0.8. The yield on...Ch. 9 - Prob. 7PCh. 9 - David Ortiz Motors has a target capital structure...Ch. 9 - Prob. 9PCh. 9 - The earnings, dividends, and stock price of Shelby...Ch. 9 - Radon Homes’ current EPS is $6.50. It was $4.42 5...Ch. 9 - Spencer Supply’s stock is currently selling for...Ch. 9 - Prob. 13PCh. 9 - Prob. 14PCh. 9 - Prob. 15PCh. 9 - Suppose the Schoof Company has this book value...Ch. 9 - Prob. 1MCCh. 9 - Prob. 2MCCh. 9 - Prob. 3MCCh. 9 - Prob. 4MCCh. 9 - Prob. 5MCCh. 9 - Prob. 6MCCh. 9 - Prob. 7MCCh. 9 - Prob. 8MCCh. 9 - Prob. 9MCCh. 9 - Prob. 10MCCh. 9 - Prob. 11MCCh. 9 - Prob. 12MCCh. 9 - Prob. 13MCCh. 9 - Prob. 14MCCh. 9 - Prob. 15MCCh. 9 - Prob. 16MC
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