Question

For which capital component must you make a tax adjustment when calculating a firm's weighted average cost of capital (WACC)? O Debt Preferred stock Equity Perpetualcold Refrigeration Company (PRC) can borrow funds at an interest rate of 10.20% for a period of six years. Its marginal federal-plus-state tax rate is 40%. PRC's after-tax cost of debt is 6.12% (rounded to two decimal places). At the present time, Perpetualcold Refrigeration Company (PRC) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,438.04 per bond, carry a coupon rate of 14%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 40%. If PRC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? 02.85% 1.98% 0 2.48% 2.98%

Answer 1

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BOND - Microsoft Excel (Product Activation Failed) Add-Ins View - 2x Σ AutoSum : A Dr General File Home Insert Page Layout Formulas Data Review % Cut Calibri -11AA = = = Ea Copy Paste B I U - - A Format Painter Clipboard Font Wrap Text F Merge Merge & Center - Center $ $ -% % , .00 ;. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Fill 2 Clear Sort & Filter Editing Find & Select Alignment Number Cells GT329 GP for GR GQ GS GT GU GV GW GX GY G Z HA HB HC HD - 313 314 315 1 DEBT 316 317 2 YTM = 10.20% AFTER TAX COST OF DEBT = 6.12% [YTM*(1-t) = 10.20%*(1-0.40)] 318 319 320 321 322 323 324 325 326 3 FACE VALUE COUPON RATE PRICE YEARS 1000 14% 1438.04 YTM= AFTER TAX COST OF DEBT = 4.13% (=RATE(GV323,-GV321*GV320,6V322,-GV320)] 2.48% [4.13%*(1-0.40)] 327 328 329 330 331 332 333 ► Rea Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFELP, IP, MRP, INFLATION WARRANT refund 0 0 YIELD SPOT ferences S4 S5 S6 BOJ 120% + Ha é o . DAS W E LL DOW9m 4 #ENG 09:21; 08-11-2019