Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 24, Problem 27PS
Tax benefits Dorlcote Milling has outstanding a $1 million 3% mortgage bond maturing in 10 years. The coupon on any new debt issued by the company is 10%. The finance director, Mr. Tulliver, cannot decide whether there is a tax benefit to repurchasing the existing bonds in the marketplace and replacing them with new 10% bonds. What do you think? Does it matter whether bond investors are taxed?
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) Bond interest payments before and after taxes Charter Corp. has issued 2,500 debentures with a total principal value of $1,500,000. The bonds have a coupon interest rate of 7%. a. What dollar amount of interest per bond can an investor expect to receive each year from Charter? b. What is Charter’s total interest expense per year associated with this bond issue? c. Assuming that Charter is in a 35% corporate tax bracket, what is the company’s net after-tax interest cost associated with this bond issue?
Jones Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%.
a) What is the pre-taxed cost of debt? Answer
%
b) What is the after tax cost of debt? Answer
%
c) Which is more relevant, the pre-tax or the after- tax cost of debt? Why? Answer
In the question above, suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sell for 57 percent of par.
What is the company’s total book value of debt? $ Answer
The total market value? $ Answer
What is your best estimate of the after-tax cost of debt now? Answer
%
(Cost of debt) Carraway Seed Company is issuing a $1,000 par value bond that pays 8 percent annual interest and matures in 9 years. Investors are willing to pay $935 for the bond. Flotation costs will be 9 percent of market value. The company is in a 30 percent tax bracket. What will be the firm's after-tax cost of debt on the bond? The firm's after-tax cost of debt on the bond will be %. (Round to two decimal places.)
Chapter 24 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 24 - Bond terms Select the most appropriate term from...Ch. 24 - Sinking funds For each of the following sinking...Ch. 24 - Security and seniority a. As a senior bondholder,...Ch. 24 - Prob. 4PSCh. 24 - Prob. 5PSCh. 24 - Private placements Explain the three principal...Ch. 24 - Prob. 7PSCh. 24 - Prob. 8PSCh. 24 - Convertible bonds True or false? a. Convertible...Ch. 24 - Prob. 10PS
Ch. 24 - Bond terms Bond prices can fall either because of...Ch. 24 - Prob. 13PSCh. 24 - Prob. 14PSCh. 24 - Security and seniority a. Residential mortgages...Ch. 24 - Prob. 16PSCh. 24 - Prob. 17PSCh. 24 - Call provisions a. If interest rates rise, will...Ch. 24 - Prob. 19PSCh. 24 - Covenants Alpha Corp. is prohibited from issuing...Ch. 24 - Prob. 21PSCh. 24 - Convertible bonds The Surplus Value Company had 10...Ch. 24 - Prob. 23PSCh. 24 - Convertible bonds Iota Microsystems 10%...Ch. 24 - Prob. 25PSCh. 24 - Convertible bonds Zenco Inc. is financed by 3...Ch. 24 - Tax benefits Dorlcote Milling has outstanding a 1...Ch. 24 - Convertible bonds This question illustrates that...Ch. 24 - Prob. 29PS
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- 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_forwardJiminy’s Cricket Farm issued a 25-year, 5 percent semiannual coupon bond 6 years ago. The bond currently sells for 106 percent of its face value. The company’s tax rate is 25 percent. a. What is the company’s pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forward(Cost of debt) Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 10 percent with interest paid semiannually and a 10-year maturity. Investors require a rate of return of 9 percent. a. Compute the market value of the bonds. b. How many bonds will the firm have to issue to receive the needed funds? c. What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent?arrow_forward
- Jones Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%. What is the pre-taxed cost of debt? What is the after tax cost of debt? Which is more relevant, the pre-tax or the after- tax cost of debt? Why? In question 3 above, suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sell for 57 percent of par. What is the company’s total book value of debt? The total market value? What is your best estimate of the after-tax cost of debt now?arrow_forwardBond interest payments before and after taxes Charter Corp. has issued 2,798 debentures with a total principal value of $2,798,000. The bonds have a coupon interest rate of 9%. a. What dollar amount of interest per bond can an investor expect to receive each year from Charter? b. What is Charter's total interest expense per year associated with this bond issue? c. Assuming that Charter is in a 34% corporate tax bracket, what is the company's net after-tax interest cost associated with this bond issue?arrow_forwardJiminy’s Cricket Farm issued a bond with 20 years to maturity and a semiannual coupon rate of 7 percent 4 years ago. The bond currently sells for 104 percent of its face value. The company’s tax rate is 23 percent. a. What is the pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the after-tax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forward
- Jones Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%.i) a. What is the pre-taxed cost of debt? b. What is the after tax cost of debt? c. Which is more relevant, the pre-tax or the after- tax cost of debt? Why? ii) In question above, suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sell for 57 percent of par.a. What is the company’s total book value of debt?b. The total market value?c. What is your best estimate of the after-tax cost of debt now?arrow_forwardJiminy’s Cricket Farm issued a 25-year, 5 percent semiannual coupon bond 6 years ago. The bond currently sells for 106 percent of its face value. The company’s tax rate is 25 percent. What is the company’s pretax cost of debt? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What is the company’s aftertax cost of debt? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.arrow_forwardA Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%. What is the pre-taxed cost of debt? What is the after tax cost of debt? Which is more relevant, the pre-tax or the after- tax cost of debt and Why? Suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sell for 57 percent of par What is the company’s total book value of debt, The total market value and What is your best estimate of the after-tax cost of debt now?arrow_forward
- An Institute issued a 30 year, 8% semi-annual bond 3 years ago. The bond currently sells for 93% of its face value. The Company’s tax rate is 35%. Find the pre-taxed cost of debt and the after tax cost of debt. Suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years to mature. Thebook value of this issue is $35 million and the bond sell for 57 percent of par. What is the company’s total book value of debt, The total market value and what is your best estimate of the after-tax cost of debt now?arrow_forwardJones Cricket Institute issued a 30 year, 8 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%.a. What is the pre-taxed cost of debt?b. What is the after-tax cost of debt?c. Which is more relevant, the pre-tax or the after-tax cost of debt? Why? In the question above, suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero-coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sells for 57 percent of par. a. What is the company’s total book value of debt?b. The total market value?c. What is your best estimate of the after-tax cost of debt now?arrow_forwardJones Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%. 1. What is the pre-taxed cost of debt? 2. What is the after tax cost of debt? 3. Which is more relevant, the pre-tax or the after- tax cost of debt? Why?arrow_forward
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