Question

Question 11 (0.2 points) A firm has $6 Billion in debt outstanding with a yield to maturity of 8%. The firm pays taxes at the rate of 27%. What is the firm's effective (after-tax) cost of debt? [Enter your answer as a percentage rounded to two decimal places.] Your Answer: Answer units View hint for Question 11 Question 12 (0.2 points) A firm has a market capitalization (market value of equity) of $11 Billion and net debt of $3 Billion. Calculate the weight of equity in the firm's weighted average cost of capital (WACC) calculation. (Note: Enter your answer as a percentage rounded to two decimal places.] Your Answer: Answer units

Answer 1

Compute the after-tax cost of debt, using the equation as shown below:

After-tax cost = Yield to maturity*(1 – Tax rate)

                       = 8%*(1 – 0.27)

                       = 5.84%

Hence, the after-tax cost of debt is 5.84%.

Compute the weight of equity, using the equation as shown below:

Equity weight = Equity capital/ (Equity capital + Debt capital)

                       = $11 billion/ ($11 billion + $3 billion)

                       = 78.57%

Hence, the equity weight is 78.57%.

Answer 2

SOLUTION :

11.

YTM of debt = 8%, Tax rate = 27%

Effective cost of debt = YTM(1 - Tax rate) = 8(1 - 0.27) = 5.84 % (ANSWER).

12.

C = E + D = 11 + 3 = 14 billion dollars

Weight of equity in WACC calculation = E/C = 11/14 = 0.7857 = 78.57 % (ANSWER).