Essay on FIN 5080 Quiz 6EC

4.       Interest expense will reflect that there is now $12 million in long-term debt in the form of bonds payable at 10.75%. Ten million dollars of new debt is being added to $2 million of old debt.

Then we can use the following formula to calculate the WACC. The cost of debt is taken to be on an after tax basis to further to account for the depreciation tax shield.

A bond with an annual coupon of $70 and originally sold at par for $1,000. The current market interest rate (yield to maturity) is 8%. This bond will sell at _______. Assuming no change in market interest rates, the bond will present the holder with capital ________ as it matures.

9. What is the Cost of Debt, before and after taxes? Using the interest rate for the largest debt…cannot use the weighted interest rate for the debt since it includes capital lease obligations with no stated rate and could not find in the notes to the financials. 5.4% After tax cost is .054 x (1-.36) = 3.5%

* b.Assume the firm’s stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $25. The firm’s straight bonds yield 12%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.)

The 8 percent pre-tax estimate is the nominal cost of debt. Because the firm's debt has semiannual coupons, its effective annual cost rate is 8.16 percent

- The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.30 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 93 percent of its face value. What is the company's pre-tax cost of debt?

The tax rate is estimated from case Exhibit 2 as Income Taxes ($496 million) divided by Earnings Before Taxes, Non-controlling Interest and Goodwill Amortization ($990 million). Note that, in 2001, interest on the company’s total debt is approximately 3.8%: $317 million of interest / $8,361 million of debt. However, this calculation is misleading since the 2000 debt is much larger than the 1999 debt of $2,270 (not in the case). You should ask yourself…should you use current yields or historical yields when calculating the cost of debt? Current yield figures should be used because Telus is considering

Calculate the after tax cost of debt using the following information (hint: see page 285 in text).

DebtThe first component of a firms WACC is its cost of debt. This is the effective rate that a company pays on its current debt. Because interest expenses on debt are deductible, the after-tax cost is used in its calculation. Cost of debt is calculated by multiplying the before-tax rate by one minus the marginal tax rate. As given in the Silicon Valley case assignment handout, SIVMED's long-term debt consists of 9.5% coupon, semiannual payment bonds with 15 years to maturity. The bonds last traded at a price of $891.00 per $1,000 par value bond. Given this data, SIVMED's cost of debt is calculated at 6.6% .

The market value of debt was calculated using the existing yield of maturity on a 5 yar bond issued on a private placement basis on July 1, 2000. With the coupon of 5.75% and the discount price of 97, YTM for this bond is 6.62%. With a discount price being 97, the market value of debt is 17,654M.

Because management assumes that the new debt is constant and perpetual, the present value of interest tax shield equals to the amount of debt multiplied by the effective tax rate, which is 38%. Thus, the present value of UST’s future tax saving should be 38% * $ 1 billion, which is $380 million.

Since the interest payments are tax deductible, the aftertax cash flow from the interest payments will be:

Present value of debt tax shield at a corporate tax rate of 35% ($ m)

The annual interest expenses should be ignored. This is done to avoid double counting the interest expense. The after-tax cost of borrowing is included in the weighted average cost of capital or discount rate. By discounting the cash flows to calculate the Net Present Value, interest costs are factored in.