Intermediate Financial Management (MindTap Course List)
12th Edition
ISBN: 9781285850030
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Question
Chapter 11, Problem 14P
Summary Introduction
To determine: After-tax cost of debt when floatation costs are 2% and 10%.
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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. %
Suppose a company will issue new 20-year debt with a par value of $1,000and a coupon rate of 9%, paid annually. The issue price will be $1,000. Thetax rate is 40%. If the flotation cost is 2% of the issue proceeds, then whatis the after-tax cost of debt? What if the flotation costs were 10% of thebond issue?
Avicorp has a $13.6 million debt issue outstanding, with a 6.2 %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
94 % 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.
Chapter 11 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 11 - Define each of the following terms:
Weighted...Ch. 11 - Prob. 2QCh. 11 - Prob. 3QCh. 11 - Distinguish between beta (i.e., market) risk,...Ch. 11 - Suppose a firm estimates its overall cost of...Ch. 11 - 11-1 After-Tax Cost of Debt
Calculate the...Ch. 11 - Prob. 2PCh. 11 - Cost of Preferred Stock
Duggins Veterinary...Ch. 11 - Prob. 4PCh. 11 - Prob. 5P
Ch. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Bond Yield and After-Tax Cost of Debt A companys...Ch. 11 - Prob. 10PCh. 11 - Prob. 11PCh. 11 - Calculation of gL and EPS Spencer Suppliess stock...Ch. 11 - The Cost of Equity and Flotation Costs
Messman...Ch. 11 - Prob. 14PCh. 11 - WACC Estimation
On January 1, the total market...Ch. 11 - Prob. 16PCh. 11 - During the last few years, Jana Industries has...Ch. 11 - What is the market interest rate on Jana’s debt,...Ch. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Prob. 5MCCh. 11 - Prob. 6MCCh. 11 - Prob. 7MCCh. 11 - Prob. 8MCCh. 11 - Prob. 9MCCh. 11 - Prob. 10MCCh. 11 - What procedures can be used to estimate the...Ch. 11 - Prob. 12MCCh. 11 - Prob. 13MCCh. 11 - Prob. 14MCCh. 11 - What four common mistakes in estimating the WACC...
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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.)arrow_forwardA firm is proceeding with a bond issue to raise (borrow) $100 million. The interest rate is the cost of debt of 8%, and interest will be paid annually for the nine (9) year term of the debt. If the company's tax rate is 30%, what is the present value of the total interest tax shields of this nine-year debt? A. $30.0 million B. $15.0 million C. $20.5 million D. $8.0 millionarrow_forwardAvicorp has a $12.8 million debt issue outstanding, with a 5.9% 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 93% of par value. **Answer MUST be rounded to FOUR decimal places**a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. ROUND TO 4 DECIMAL PLACESb. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? ROUND TO 4 DECIMAL PLACES Note: Assume that the firm will always be able to utilize its full interest tax shield. (Please show work, a plus if shown in Excel with formulas shown!)arrow_forward
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