The coupon rate on an issue of debt is 9%. The yield to maturity on this issue is 11%. The corporate tax rate is 32%. What would be the approximate after-tax cost of debt for a new issue of bonds? (Round your answer to 2 decimal places.)

The coupon rate on an issue of debt is 9%. The yield to maturity on this issue is 11%. The corporate tax rate is 32%. What would be the approximate after-tax cost of debt for a new issue of bonds? (Round your answer to 2 decimal places.)

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 9P: Bond Yield and After-Tax Cost of Debt A companys 6% coupon rate, semiannual payment, 1,000 par value...

See similar textbooks

Related questions

Q: Which of the following would provide the greatest return on $15,000 if it is invested at a nominal…

A: We need to use compound interest formula to return oon above investment.A = P(1+i)nWhereA =Final…

Q: A local bank policy is to hold 12.77% of its deposits as reserves. With current deposits of $8…

A: Variables in the question:Bank policy is to hold 12.77% of its deposits as reservesCurrent deposits…

Q: What is the price of a European call option on a non-dividend-paying stock when the stock price is…

A: A Call Option is a financial contract that gives the holder the right, but not the obligation, to…

Q: You have two credit cards with the following balances: Card A Credit limit: $20,000 Current Balance:…

A: In order to determine which credit card is harming your credit more, we need to calculate and…

Q: Consider the following cash flows and interest rates: 0 r= 2.5% 1 r = 1.5% 5,000 2 r = 1.9% 5,000 3…

A: The present value of any cash flow or lump sum amount is the discounted sum of the same cash flows…

Q: A students deposits 1500 pesos in a 9% compounded semi-annually account today.He intends to deposit…

A: The formula for calculating future value:Where FV is the future valuePV is the present valuer is the…

Q: Through your career, you have saved-up $1,150,000. You are now ready to retire. You discuss your…

A: Present Value = pv = $1,150,000Annuity = pmt = $68,000Time = nper = 25 Years

Q: Could you please show me how to solve this with formulas

A: We can determine the amount to be repaid under simple interest (SI) and compound interest (CI) using…

Q: ress was purchased for $300,000. It was expected t ■lvage value of $30,000. If the firm's interest…

A: Capital cost is cost of ownership of the equipment based on time value and economic life of…

Q: You use today's spot rate of the Brazilian real to forecast the spot rate of the real for one month…

A: Value at Risk (VaR):Value at Risk (VaR) is a widely used risk management technique that quantifies…

Q: calculate the present value of this cash outflow assuming trade credit terms of a) 30 days b) 45…

A: Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts…

Q: AA Corporation's stock has a beta of 2.1. The risk-free rate is 6% and the expected return on the…

A: We need to calculate CAPM equation to calculate required rate return.Required rate of return = Risk…

Q: If the spot rate of MXN turns out to be $0.085 on 1/1/X1, the net cash flow of a US importer from…

A: Exchange rate is rate at which currency is exchanged with other currency and that depends on…

Q: ome excess cash it would like to invest in marketable securities for a long-term hold. Its…

A: Yield is the rate of return realized on assets by holding the assets but there are taxes applicable…

Q: The Elberta Fruit Farm of Ontario is considering buying a cherry-picking machine to replace the…

A: Here,Salary of Part Time Workers $ 190,000.00Cost of Cherry pricker $ 510,000.00Life of…

Q: Steady As She Goes, Inc., will pay a year-end dividend of $2.6 per share. Investors expect the…

A: As per Dividend Discount model,P0 = D1 /(ke-g)Where,D1 = Dividend ke = expected rate of returng =…

Q: A stock just paid a dividend of $2.20. The dividend is expected to grow at 20.84% for three years…

A: Current Dividend = d0 = $2.20Growth Rate for First 3 Years = g3 = 20.84%Growth rate after 3 years =…

Q: 7) The 10-year Treasury bond has a YTM = 4.726%. The price is $9,484.38 and the face value is…

A: We should first determine the semiannual coupon and then compute the coupon rate.

Q: JavaCity is considering new brewing equipment. The amount of initial investment will be $550 today…

A: Net present value can be found as the difference between present value of cash flow and initial…

Q: A pharmaceutical industry portfolio is constructed using Johnson & Johnson (NYSE:JNJ) and Pfizer…

A: The potential return on an investment that carries no financial risk, such as government bonds or…

Q: A new investment offers TimeTek future cash flows of SQ in six years and SP in 12 years. Assuming a…

A: The effect of interest rates refers to the impact that changes in the cost of borrowing money have…

Q: The cash price of a $1,000 bond that matures in exactly 18 months is $1001.74. Current continuously…

A: Price of the bond is the PV of all future coupons and par value discounted at the spot rate. By…

Q: A project has the following cash flows. What is the payback period? Year 0 1 2 3 Cash Flow -…

A: YearsCash flowsYear-0($5,000)Year-1$2,700Year-2$3,300Year-3$1,400Required:Payback Period =?

Q: Your firm has a credit rating of A. You notice that the credit spread for five-year maturity A debt…

A: Bond pricing refers to the process of determining the value or worth of a bond. The price of a bond…

Q: Atlantic Northern Inc. just reported a net income of $11,000,000, and its current stock price is…

A: 1. P/E ratio = whereMPS = Market price per shareEPS = earnings per share2. market-to-book (M/B)…

Q: Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental…

A: Capital budgeting is a financial process used by businesses to evaluate and select investment…

Q: Required information On January 1, 2024, Avalanche Corporation borrowed $120,000 from First Bank by…

A: A risk management technique called hedging aids players in reducing the effects of negative market…

Q: Nielson Motors (NM) is a newly public firm with 25 million shares outstanding. You are doing a…

A: Equity beta can also be referred to as the levered beta which considers the tax rates. This value…

Q: You buy a house for $230000, and take out a 30-year mortgage at 6% interest. For simplicity, assume…

A: Mortgage refers to borrowing an amount for the purchase of an asset and in return borrowed amount is…

Q: 7. T. Brisendine Inc. just paid a dividend of $6 per share. Future dividends are expected to grow at…

A: As per dividend discount model, the current stock price is

Q: Calculate the amount of each automatic withdrawal, assuming the withdrawals are made at the end of…

A: We can determine the semimonthly amount using the formula below:In the formula above r = periodic…

Q: Delsing Canning Company is considering an expansion of its facilities. Its current income statement…

A: “Since you have posted a question with multiple sub-parts, we will solve first three sub-parts for…

Q: Seller A Offer Price 900 O b) 950 1,000 Quantity (shares) over 150 shares c) 150 shares d) less than…

A: Variables in the question: Seller A Offer Price ($)Quantity (shares)Stock Market Price for Google…

Q: Wyclef has an investment of 500 shares of stock in Partridge Capital valued at $12 each, Partridge…

A: Solution:Stock dividend means the issue of additional shares to the current shareholders in form of…

Q: Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier…

A: Free cash flow for Shark= $7100000Growth rate for five years= 7%Growth rate for perpetuity= 4%Cost…

Q: You are looking to invest in a real-estate property to rent out that will cost $100,000. The…

A: Net present value is the difference between the present value of cash flow and initial investment…

Q: The Bandon Pine Corporation's purchases from suppliers in a quarter are equal to 75 percent of the…

A: Variables in the question: Q1Q2Q3Q4Sales ($)2310261023102010Sales for the 1st qtr of the following…

Q: Suppose that General Motors Acceptance Corporation issued a bond with 10 years until maturity, a…

A: Time = t = 10 YearsFace Value = fv = $1000Coupon Rate = 7.1%Yield to Maturity = r = 6.1%

Q: You find the following Treasury bond quotes. To calculate the number of years until maturity, assume…

A: Asked price refers to the specific price at which bondholder decides to trade the bond. The counter…

Q: You and your father created an agreement: he would give a used car to you and you would paint the…

A: A contract is a legally binding agreement between two or more parties that outlines their rights and…

Q: The bond has a coupon rate of 6.47 percent, it makes semiannual payments, and there are 4 months to…

A: We can determine the invoice price of the bond using the formulas below:

Q: A call option is currently selling for $3. It has a strike price of $65 and six months to maturity.…

A: Put-call parity is an options pricing that defines the relationship between the prices of European…

Q: What is the coupon rate for the bond? Assume semi-annual payments. Answer as a percent! Bond Coupon…

A: Bonds refer to instruments that are used by issuing companies to raise debt capital from…

Q: Westco Company issued 25-year bonds 5 years ago at a coupon rate of 6.29 percent. The bonds make…

A: Compound = Semiannually = 2Time = t = (25 - 5) * 2 = 40Coupon Rate = 6.29 / 2 = 3.145%Face Value =…

Q: ynovec Corp. is experiencing rapid growth. Dividends are expected to grow at 26 percent per year…

A: Intrinsic value of stock is the present value of dividends and present value of terminal value of…

Q: A 10-year bond of a firm in severe financial distress has a coupon rate of 10% and sells for $900.…

A: YTM refers to the total return that an investor will earn by holding a bond to maturity. YTM makes…

Q: Bassinger Company plans to buy a new machine for $60,000 that will have an estimated useful life of…

A: The profitability index represents the relationship between the costs and benefits of a project. It…

Q: QUESTION 15 A7.5 percent coupon bond with nine years left to maturity is priced to offer an 11.2…

A: “Since you have asked multiple question, we will solve the first question for you. If you want any…

Q: An investor longs a 210 strike Mar 20, 2022 call on HON with a premium of 16.75 and shorts a 250…

A: Breakeven price is the price at which the strategy makes no profit or loss.We can determine the…

Q: Answer is complete and correct. $ 1,329.34 $ 1,328.75 a. Asked price b. Bid price

A: Asked price of the bond is the PV of all future coupons and par value discounted at the asked yield.…

Question

kk.2

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Define=after tax cost of debt

VIEW

Step 2: Calculation of after tax cost of debt

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Bond Yield and After-Tax Cost of Debt A companys 6% coupon rate, semiannual payment, 1,000 par value bond that matures in 30 years sells at a price of 515.16. The companys federal-plus-state tax rate is 40%. What is the firms after-tax component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.)
The coupon rate on an issue of debt is 8%. The yield to maturity on this issue is 10%. The corporate tax rate is 21%. What would be the approximate after-tax cost of debt for a new issue of bonds?
. 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 7.5% percent annual coupon bond with 20 years to maturity, selling for 104 percent of par. The bonds make semiannual payments. What is the before tax cost of debt? If the tax rate is 40%, what is the after-tax cost of debt? This question was asked before, but the answer gave an explanation for using excel. I would like an explanation for calculating this answer without excel.
3. Laurel, Inc., has debt outstanding with a coupon rate of 6.0% and a yield to maturity of 7.0%. 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.)
PDQ, Inc. expects EBIT to be approximately $12.2 million per year for the foreseeable future, and it has 100,000 20-year, 6 percent annual coupon bonds outstanding. (Use Table 11.1.)What would the appropriate tax rate be for use in the calculation of the debt component of PDQ’s WACC? (Round your answer to 2 decimal places.)
3. Avicorp has a $12.3 million debt issue outstanding, with a 6.1% 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. **round to four decimal places**
Sabine Co has outstanding bonds with 10 years remaining until maturity, a coupon rate of 7%, semi-annual coupon payments, and a market price of 96.5% of par value. If the tax rate is 16%, what is the firm's after-tax cost of debt? Enter your answer as an annualized rate in decimal format, and show four decimal places. For example, if your answer is 5.1%, enter .0510.
Walter Corp.'s outstanding bonds have a 5.8% coupon, 5 years left until maturity, and are currently priced at $974.67. The firm's marginal tax rate is 25%. Walter's after-tax cost of debt is_______?
Your company is borrowing $5,800,000 in the form of bonds. The par value and market value are the same at $1,000. The yield to maturity rate and stated interest rate are the same at 7%. Your company's income tax rate is 27%. What is the net yield and interest rate for the bonds?
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. %
Company B has $50 million of bonds outstanding (face value). These are 10-year bonds, and they are currently selling at 98% of par. The annual coupon rate on the bond issue is 4%. What would be Company B’s before-tax component cost of debt? If company B has a tax-rate of 25%, what is their after-tax cost of debt?