Answered: What is after tax cost of debt?

Business

Finance

What is after tax cost of debt?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 15P

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Suppose the Schoof Company has this book value balance sheet: The notes payable are to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the companys permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of 1,000, an annual coupon interest rate of 6%, and a 20-year maturity. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of 60 per share. Calculate the firms market value capital structure.
Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the following data: The yield on the company’s outstanding bonds is 7.75%, its tax rate is 25%, the next expected dividend is $0.65 a share, the dividend is expected to grow at a constant rate of 6.00% a year, the price of the stock is $14.00 per share, the flotation cost for selling new shares is F = 10%, and the target capital structure is 45% debt and 55% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget? 9.96% 7.98% 10.12% 8.75% 8.23%
Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the following data: The yield on the company’s outstanding bonds is 7.75%, its tax rate is 40%, the next expected dividend is $0.65 a share, the dividend is expected to grow at a constant rate of 6.00% a year, the price of the stock is $16.00 per share, the flotation cost for selling new shares is F = 10%, and the target capital structure is 45% debt and 55% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget? (Hint: required return on stock needs to be adjusted by flotation cost re = D1/(P0 × (1 - F)) + g) Group of answer choices 8.58% 7.80% 9.61% 9.45% 7.88%
Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the following data: The yield on the company's outstanding bonds is 7.75%, its tax rate is 40%, the next expected dividend is S0.65 a share, the dividend is expected to grow at a constant rate of 6.00% a year, the price of the stock is $17.00 per share, the flotation cost for selling new shares is F 10%, and the target capital structure is 45% debt and 55% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget? Please provide each step and why, and how to get to the next step
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Petmart recently hired Jim as a consultant to estimate the company’s WACC. Jim has obtained the following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual coupon, a par value of $1,000, and a market price of $1,050.00. (2) The company’s tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock’s beta is 1.80. (4) The target capital structure consists of 45% debt and the balance is common equity. The firm uses CAPM to estimate the cost of common stock, and it does not expect to issue any new shares. What is its WACC?
sunburn sunscreen has a zero coupon bond issue outstanding with a $21,000 face value that matures in one year. the current market value of the firm's assets is $22,800. The standard deviation of the return on the firm's assets is 26 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. based on the black-scholes model, what is the market value of the firm's equity and debt?
Gateway Services' CFO is interested in estimating the company's WACC. Eight years ago, the company issued a 30-year bond with a 7.5 percent annual coupon rate, payable semi-annually. The bonds have a face value of $1,000 per unit and currently sell for $1,105. The company’s common stock has a beta of 1.8, the risk-free rate is 2.5 percent, and the expected return on the market is 8.0 percent. Gateway’s tax rate is 25 percent and its target capital structure consists of 70 percent common equity and 30 percent debt. What is the company’s WACC?
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $9,000 face value that matures in one year. The current market value of the firm's assets is $9,600. The standard deviation of the return on the firm's assets is 36 percent per year, and the annual risk-free rate is 7 percent per year, compounded continuously. Based on the Black Scholes model, what is the market value of firm’s equity and the market value of the firm's debt?
Frostbite thermalwear has a zero coupon bond issue outstanding with a face value of 18,000 that matures in one year. The curent market value of the firm assets is 22,000. The standard deviation of the return on the firm assets is 51 percent per year, and the annual risk free rate is 7 percent per year, compounded continuously. what is the Market value of the firm's equity? What is the Market value of the firm's debt?
A company has its debt structured as a single zero-coupon bond that matures in 5 years. The face value of the debt outstanding is $40 million and the current value of the company's total assets is $36 million. The standard deviation of the return of its assets is 30 percent per year, and the risk-free rate is estimated to be about 5 percent per year, compounded continuously. Compute the following quantities: Current market value of the company's equity Current market value of the company's debt Continuously compounded cost of debt Suppose this company has a new project opportunity available. This project has an estimated NPV of $3,000,000. If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged. Assuming the company decided to undertake the new project and does not borrow any additional funds, what is the new continuously compounded cost of debt? Explain in detail the impact this project has on the cost of debt.
Indie Inc. recently hired you as a consultant to estimate the company's WACC. You get the following information. (1) Indie Inc. non-callable bonds matures in 25 years, has an 8.00% annual coupon, a face value of $1,000, and a market price of $1,075.00. (2) The corporate tax rate is 40%. (3) The risk-free rate of return is 4.50%, the market risk premium is 5.50%, and the beta of the stock is 1.20. (4) The target capital structure consists of 35% debt and the rest is common stock. Indie Inc. uses the CAPM to estimate the cost of equity, and will not issue new common stock. How much is WACC worth? a. 7.13% b. 7.51% c. 7.90% d. 8.32% e. 8.76%