Question

just question 20.

a. Use the CAPM to estmmave e b. Now use the constant growth model to estimate the cL c. Which of the two estimates is more reasonable? 20. Cost of Debt. Micro Spinoffs Inc. issued 20-year debt a year ago at par value with a coupon rate of 8%, paid annually. Today, the debt is selling at $1,050. If the firm's tax bracket is 21%, what is its percentage cost of debt? (LO13-4) Whitchurch has preferred stock outstanding. The stock rate is 21% . What is the

Answer 1

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N

k=1

K =19

1050 =∑ [(8*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^19

k=1

YTM% = 7.5 = pretax cost of debt

After tax rate = YTM * (1-Tax rate)

After tax rate = 7.5 * (1-0.21)

After tax rate = 5.93