Question
AXYZ Co's. bond has a $1,000 face value and a coupon rate of 6.2% paid annually. The firm's marginal
tax rate is 35%. Assuming no flotation costs, what is the after-tax cost of debt for XYZ Co.?
9.
Where
kdtar =After tax cost of debt
ka kahu (1-t)
kabe = Before tax cost of debt
t Marginal tax rate in decimal format
x (1
kdat
What would be XYZ Co's. after tax cost of debt if corporate tax rates are reduced by 10% across the
board making XYZ Co's. marginal tax rate 25%?
kdat
x (1-_
Based on these results, does a tax cut make debt more or less preferable than equity financing? Circle
your answer
LESS PREFERABLE
MORE PREFERABLE
expand button
Transcribed Image Text:AXYZ Co's. bond has a $1,000 face value and a coupon rate of 6.2% paid annually. The firm's marginal tax rate is 35%. Assuming no flotation costs, what is the after-tax cost of debt for XYZ Co.? 9. Where kdtar =After tax cost of debt ka kahu (1-t) kabe = Before tax cost of debt t Marginal tax rate in decimal format x (1 kdat What would be XYZ Co's. after tax cost of debt if corporate tax rates are reduced by 10% across the board making XYZ Co's. marginal tax rate 25%? kdat x (1-_ Based on these results, does a tax cut make debt more or less preferable than equity financing? Circle your answer LESS PREFERABLE MORE PREFERABLE
Expert Solution

Want to see the full answer?

Check out a sample Q&A here
Blurred answer
Students who’ve seen this question also like:
Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
Not helpful? See similar books
Essentials Of Investments
Essentials Of Investments
Investments: Background And Issues. 1PS
marketing sidebar icon
Want to see this answer and more?
Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*
*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.

Related Finance Q&A

Find answers to questions asked by students like you.

Q: Laurel, Inc., has debt outstanding with a coupon rate of 6.1% and a yield to maturity of 7.2%. Its…

A: Effective after tax cost of debt = Before tax cost of debt (YTM) * (1- tax rate)

Q: ACT Inc. has a $1,000 (face value), 20 year bond issue selling for $1,229.40 that pays  an annual…

A: 1. What would be BAT's current before-tax component cost of debt   It can be calculated using rate…

Q: Kose, Inc., has a target debt-equity ratio of 1.31. Its WACC is 8.1 percent, and the tax rate is 22…

A: Kose, Inc., has a target debt-equity ratio of 1.31. Its WACC is 8.1 percent, and the tax rate is 22…

Q: Reena Industries has $10,000 of debt outstanding that is selling at par and has a coupon rate of 7%.…

A: Meaning of Tax Shield  & Present Value of Tax Shield Tax shield is the reduction in the taxable…

Q: Ladder Works has debt outstanding with a coupon rate of 6 percent and a yield to maturity of 6.8…

A: Cost of Debt It is the cost of raising capital of debt sources by the issuer(company).…

Q: Butler, Inc., has a target debt-equity ratio of 1.40. Its WACC is 9.5 percent, and the tax rate is…

A: WACC = (cost of equity * weight of equity) + (after tax cost of debt * weight of debt)weight of…

Q: Need help with both questions

A: Calculate the cost of debt as follows:

Q: Neptune Corporation's bonds have 20-years to maturity and a coupon rate of 8.5%. Interest is paid…

A: Bonds are debts instruments that are issued by entities to raise funds and meet their capital…

Q: Summit Builders has a market debt-equity ratio of 0.25, a corporate tax rate of 40%, and pays 7%…

A: Weight of debt = Debt/ (Debt + equity) Weight of debt = 0.25/1.25 =20%

Q: AAPL Inc. is a publicly traded company that has $120 million in bank loan on its books, with a…

A: Cost of debt: It is the interest that the company pays to its debt holders.

Q: Nobleford Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with…

A: After tax cost of debt = Before tax cost of debt * (1-tax rate) Before tax cost of debt = YTM of the…

Q: ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding…

A: Yield to maturity refers to the internal rate of return which is earned by the investor who makes…

Q: ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding…

A: Using excel Rate function to calculate YTM of the bond

Q: Madoff Corporation raised money through a bond issue with a total principal value of $3,000,000.…

A: a.The formula to calculate coupon payment received by bondholders is given below:

Q: J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt issue…

A: Calculation of Pre-tax Cost of Debt and After-tax Cost of Debt:The pre-tax cost of debt is 8.28% and…

Q: ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding…

A: The question is based on the valuation of bond concept to find cost (yield) of bond.

Q: Sunrise, Incorporated, is trying to determine its cost of debt. The firm has a debt issue…

A: The weighted average capital cost (WACC) consists of the measurement of the capital price of the…

Q: NuStuff Inc. has raised $8M by selling bonds at an average rate of 7%. NuStuff’s stockholders expect…

A: WACC- Weighted average cost of capital (WACC) is the rate that a company is expected to pay on…

Q: Walter Corp.'s outstanding bonds have a 5.8% coupon, 5 years left until maturity, and are currently…

A: Given, Price = $974.67 Coupon rate = 5.8% Number of years = 5 Tax = 0.25 Assume the par value of…

Q: Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds…

A: Calculation of After-tax Cost of Debt:The after-tax cost of debt is 4.48%.Excel Spreadsheet:

Q: Avicorp has a $13.3 million debt issue outstanding, with a 6.1% coupon rate. The debt has…

A: Yield-to-Maturity is IRR for Bond Payments that shows effective return that an investor will receive…

Q: Summit Builders has a market debt-equity ratio of 1.05 and a corporate tax rate of 21%, and it pays…

A: Excel Spreadsheet: Excel Workings:

Q: J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding…

A: Let face value be $1000 Price of bond = 109% of face value = $1090 Time = 20 years ; semi annual…

Q: The tax rate applicable to Blue Co. is 20%. The firm pays 5% interest on the P350,000 outstanding…

A: Click to see the answer

Q: The tax rate applicable to Blue Co. is 20%. The firm pays 5% interest on the P350,000 outstanding…

A: Outstanding loan = P 350000 Interest rate = 5% Tax rate = 20% Preferred dividends = P 16500

Q: The following is the information on debt issued by Huntington Power Co. Calculate the after-tax cost…

A: Interest on debt is a tax deductible expense, that's why after tax cost of debt is taken.

Q: Cote Import has several bond issues outstanding, each making semiannual interest payments. The bonds…

A: Using excel RATE function

Q: Avicorp has a $13.3 million debt issue outstanding, with a 5.8% coupon rate. The debt has…

A: Let Face Value = 100 Coupon rate = 5.8%  Coupon Amount -100*5.8%/2 = 2.90 Years = 5 Terms(n) =5*2…

Q: Madoff Corporation raised money through a bond issue with a total principal value of $3,000,000.…

A: A financial instrument with a fixed cost that helps a company to raise funds for business operations…

Q: Madoff Corporation raised money through a bond issue with a total principal value of $3,000,000.…

A: Face value of each bond =$1000 coupon rate = 6% So,annual coupon payment = 0.06*1000 =$60

Q: Madoff Corporation raised money through a bond issue with a total principal value of $3,000,000.…

A: Given that, issue price of bond = $3000000 par value of bond = $1000 coupon rate of bond = 6% tax…

Q: Avicorp has a $14.6 million debt issue outstanding, with a 5.8% coupon rate. The debt has…

A: Yield to maturity (YTM) refers to the rate of return on a bond provided that the bond is held till…

Q: Avicorp has a $14.6 million debt issue outstanding, with a 5.8% coupon rate. The debt has…

A: Cost of debt refers to the minimum cost that a company has to bear for raising funds through the…

Q: The tax rate applicable to Ivan Co. is 20%. The firm pays 5% interest on the P350,000 outstanding…

A: Interest paid = Face value of Loan * Interest rate =350000 * 5% = 17500

Q: Using the cost-of-debt approximation formula, determine the pre-tax cost for a bond that sells at $…

A: a) The question gives the following information:

Q: Avicorp has a $13.6 million debt issue​ outstanding, with a 6.2 %coupon rate. The debt has​…

A: a.Computation of the pre-tax cost of debt:

Q: J&R Renovation, Ic., is trying to determine its cost of debt. The firm has a debt issue outstanding…

A: The cost of debt shall be the yield to maturity (YTM). Yield to maturity refers to the rate of…

Q: ICU Window, inc, is trying to determine its cost of debt. The firm has a debt issue outstanding with…

A: The computations as follows: Hence, the pre-tax cost of debt and after-tax cost of debt are 2.69%…

Q: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,550 face value…

A: Pre tax cost of debt is yield to maturity of the bond we deduct tax from cost of debt because…

Q: What is the pre-taxed cost of debt? b. What is the after-tax cost of debt? c. Which is more…

A: a) The pre-taxed cost of debt is its yield to maturity (YTM) Assume that Face value or par value of…

Q: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value…

A: Information Provided: Term = 20 years remaining Face value = $1000 Coupon rate = 8% semi-annually…

Q: A company has outstanding 20-year noncallable bonds with a face value of $1,000,an 11% annual…

A: Required rate of interest is the return provided by the bond. At required rate, the present value of…

Q: Jiminy’s Cricket Farm issued a 25-year, 5 percent semiannual coupon bond 6 years ago. The bond…

A: assume  face value = $1000 coupon = 0.05 x 1000 x 0.5= $25 price = 106% x 1000=$1060 n = 25-6 = 19 x…

Q: S.ALAM group financed using the following weights: 35% long term debt, 15% preferred stock and 40%…

A: Long Term Weights = 35% Preferred stock Weights = 15% Common Stock Equity Weights = 40% Retained…

Q: Several years ago, the ABC Company sold a $1,000 par value bond that now has 20 years to maturity…

A: Click to see the answer

Q: Several years ago, the ABC Company sold a $1,000 par value bond that now has 20 years to maturity…

A: Yield to Maturity is the total return anticipated on a bond if a bond is held until maturity.

Q: Currently, Bloom Flowers Inc. has a capital structure consisting of20% debt and 80% equity. Bloom's…

A: Weighted Average Cost of Capital is an indicator of the combined cost of debt and equity capital…

Q: Jiminy's Cricket Farm issued a bond with 25 years to maturity and a semiannual coupon rate of 6…

A: Given, Coupon rate = 6%

Q: Gainer Company has three sources of financing: $3 million of mortgage bonds paying 5 percent…

A: After-Tax Cost for Mortage bonds = Interest rate x (1 - tax rate) = 5% x (1-0.40) = 3% After-Tax…

Q: Fusion Packaging is financed with 55% equity and 45% debt.  The required rate of return on its debt…

A: Weight of equity (We) = 55% Weight of debt (Wd) = 45% Cost of debt (Rd) = 4.4% Cost of equity (Re) =…

Knowledge Booster
Recommended textbooks for you
  • Essentials Of Investments
    Finance
    ISBN:9781260013924
    Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
    Publisher:Mcgraw-hill Education,
    FUNDAMENTALS OF CORPORATE FINANCE
    Finance
    ISBN:9781260013962
    Author:BREALEY
    Publisher:RENT MCG
    Financial Management: Theory & Practice
    Finance
    ISBN:9781337909730
    Author:Brigham
    Publisher:Cengage
  • Foundations Of Finance
    Finance
    ISBN:9780134897264
    Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
    Publisher:Pearson,
    Fundamentals of Financial Management (MindTap Cou...
    Finance
    ISBN:9781337395250
    Author:Eugene F. Brigham, Joel F. Houston
    Publisher:Cengage Learning
    Corporate Finance (The Mcgraw-hill/Irwin Series i...
    Finance
    ISBN:9780077861759
    Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
    Publisher:McGraw-Hill Education
  • Essentials Of Investments
    Finance
    ISBN:9781260013924
    Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
    Publisher:Mcgraw-hill Education,
    FUNDAMENTALS OF CORPORATE FINANCE
    Finance
    ISBN:9781260013962
    Author:BREALEY
    Publisher:RENT MCG
    Financial Management: Theory & Practice
    Finance
    ISBN:9781337909730
    Author:Brigham
    Publisher:Cengage
    Foundations Of Finance
    Finance
    ISBN:9780134897264
    Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
    Publisher:Pearson,
    Fundamentals of Financial Management (MindTap Cou...
    Finance
    ISBN:9781337395250
    Author:Eugene F. Brigham, Joel F. Houston
    Publisher:Cengage Learning
    Corporate Finance (The Mcgraw-hill/Irwin Series i...
    Finance
    ISBN:9780077861759
    Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
    Publisher:McGraw-Hill Education