7. Calculating Cost of Debt For the firm in Problem 6, suppose the book value of the debt issue is $135 million. In addition, the company has a second debt issue, a zero coupon bond with 12 years left to maturity; the book value of this issue is $65 million, and it sells for 64.3 percent of par. What is the total book value of debt? The total market value? What is the aftertax cost of debt now?

7. Calculating Cost of Debt For the firm in Problem 6, suppose the book value of the debt issue is $135 million. In addition, the company has a second debt issue, a zero coupon bond with 12 years left to maturity; the book value of this issue is $65 million, and it sells for 64.3 percent of par. What is the total book value of debt? The total market value? What is the aftertax cost of debt now?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 14P

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Suppose there is a large probability that L will default on its debt. For the purpose of this example, assume that the value of Ls operations is 4 million (the value of its debt plus equity). Assume also that its debt consists of 1-year, zero coupon bonds with a face value of 2 million. Finally, assume that Ls volatility, , is 0.60 and that the risk-free rate rRF is 6%.
Next, we need to calculate MMMs cost of debt. We can use different approaches to estimate it One approach is to take the companys interest expense and divide it by total debt (which is the sum of short-term debt and long-term debt). This approach only works if the historical cost of debt equals the yield to maturity in todays market (i.e., if MMMs outstanding bonds are trading at dose to par). This approach may produce misleading estimates in years in which MMM issues a significant amount of new debt. For example, if a company issues a great deal of debt at the end of the year, the full amount of debt will appear on the year-end balance sheet, yet we still may not see a sharp increase in annual interest expense because the debt was outstanding for only a small portion of the entire year. When this situation occurs, the estimated cost of debt will likely understate the true cost of debt. Another approach is to try to find this number in the notes to the companys annual report by accessing the company's home page and its Investor Relations section. Alternatively, you can go to other external sources, such as bondsonline.com, for corporate bond spreads, which can be used to find estimates of the cost of debt. Finally, you can also go to Morningstar.com, which will provide yield to maturity information on the firms various bond issues. A longer-term issues YTM could provide an estimate of the firms current cost of debt to be used in the WACC calculation. Remember that you need the after-tax cost of debt to calculate a firm's WACC, so you will need MMMs tax rate (which has averaged around 30% in recent years). What is your estimate of MMMs after-tax cost of debt?
A company had WACC (weighted average cost of capital) equal to 8. % If the company pays off mortgage bonds with an interest rate of 4% and issues an equal amount of new stock considered to be relatively risky by the market, which of the following is true? a. residual income will increase. b. ROI will decrease. c. WACC will increase. d. WACC will decrease.
Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7, what is the cost of equity, RS?
Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt?
A) For questions A, B, and C, use the following information: Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt? Format as a percentage and round to two places past the decimal point as "X.XX B) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7, what is the…
Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and as a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the answers from Questions 7 and 8, what is the firm’s WACC?
. ABC Co. has $15 million of debt outstanding with a coupon rate of 9%. Currently, the yield to maturity on these bonds is 7%. If the firm’s tax rate is 35%, what is the after-tax cost of debt? A. 10.76% B. 5.85% C. 4.55% D. 5.40%
A firm has outstanding debt with a coupon rate of 8%, nine years maturity, and a price of $1,000 (which is the face value of the debt). What is the after-tax cost of debt if the marginal tax rate of the firm is 40%? A) 3.8% B) 4.8% C) 4.3% D) 4.4%
A firm is currently an all equity firm that Has an annual projected EBIT of$136,900. The current cost of equity is 16.5% and the tax rate is 20%. The firm is considering $118,000 of debt with a coupon rate of 7.5% to its capital structure. The debt will be sold at a par value. What is the value of the unleavened firm (pre-debt)? A) 730,133 B) 763,570 C) 663,758 D) 696,945 E) 630,570