Avicorp has a $ 10.2 million debt issue outstanding, with a 5.8 % coupon rate. The debt has semi- annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 95% of par value.a. What is Avicorp's pre- tax cost of debt? Note: Compute the effective annual return.b. If Avicorp faces a 40 % tax rate, what is its after-tax cost of debt?Note: Assume that the firm will always be able to utilize its full interest tax shield. a. The cost of debt is % per year. (Round to four decimal places.)b. If Avicorp faces a40 % tax rate, the after-tax cost of debt is %. (Round to four decimal places.)

Avicorp has a $ 10.2 million debt issue outstanding, with a 5.8 % coupon rate. The debt has semi- annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 95% of par value.a. What is Avicorp's pre- tax cost of debt? Note: Compute the effective annual return.b. If Avicorp faces a 40 % tax rate, what is its after-tax cost of debt?Note: Assume that the firm will always be able to utilize its full interest tax shield. a. The cost of debt is % per year. (Round to four decimal places.)b. If Avicorp faces a40 % tax rate, the after-tax cost of debt is %. (Round to four decimal places.)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 9 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 6.6 percent annually. What is the company's pretax cost of debt? If the tax rate is 24 percent, what is the aftertax cost of debt? Pretax cost of debt: __________% Aftertax cost of debt: __________%
Nobleford Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 23 years to maturity that is quoted at 97% of face value. The issue makes semiannual payments and has an embedded cost of 5% annually. Assume the par value of the bond is $1,000. What is the company’s pre-tax cost of debt? If the tax rate is 35%, what is the after-tax cost of debt?
Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 16 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 4 percent annually. What is the company's pretax cost of debt? If the tax rate is 25%, what is the aftertax cost of debt?
Battlefield is trying to determine its cost of debt. The firm has a debt issue outstanding with seven years to maturity that is quoted at 113% of face value. The issue makes semiannual payments and has an embedded coupon payment of 6.4% annually. If the tax rate is 38%, what is the aftertax cost of debt? 2.01 2.76 2.63 1.89 1.82
Laurel, Inc., has debt outstanding with a coupon rate of 5.9% and a yield to maturity of 6.9%. Its tax rate is 40%. 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.)
The Cost of Debt and Flotation Costs. Suppose a company will issue new 25-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The issue price will be $1,000. The tax rate is 25%. If the flotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt? Round your answer to two decimal places. % What if the flotation costs were 10% of the bond issue? Round your answer to two decimal places. %
Laurel, Inc., has debt outstanding with a coupon rate of 5.9% and a yield to maturity of 6.8%. 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.)
Arnell Industries has 5.5 million in permanent debt outstanding. The firm will pay interest only on this debt. Arnell's marginal tax rate is expected to be 40% for the foreseeable future. a. Suppose Arnell pays interest of 9% per year on its debt. What is its annual interest tax shield? b. What is the present value of the interest tax shield, assuming its risk is the same as the loan? c. Suppose instead the interest rate on the debt were 7%. What is the present value of the interest tax shield in this case?
Suppose a company will issue new 20-year debt with a par value of $1,000 and acoupon rate of 9%, paid annually. The tax rate is 40%. If the flotation cost is 2% ofthe issue proceeds, what is the after-tax cost of debt?
PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $20 million, $28 million, or $36 million. Its corporate tax rate is 38%, and investors pay a 30% tax rate on income from equity and a 35% tax rate on interest income. a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? b. What is the effective tax advantage of debt for interest expenses in excess of $36 million? (Ignore carryforwards). c. What is the expected effective tax advantage of debt for interest expenses between $20 million and $28 million? (Ignore carryforwards). d. What level of interest expense provides PMF with the greatest tax benefit?
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Company B currently has $25 million in debt outstanding. In addition to 9.0% interest, it plans to repay 6% of the remaining balance each year. If Company B has a marginal corporate tax rate of 38%, and if the interest tax shields have the same risk as the loan, what is the present value of the interest tax shield from the debt?

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