Question

Please solve the following problem using Financial Formulas Only. Please No Excel.

Roberto Inc. is a manufacturing company. The company has always followed their ideal capital structure which the management insists is 40% debt and 60% equity capital. The company can issue bonds for 9% coupon rate with 22 years to maturity. The interest is paid semi-annually. The bonds can be issued with a price of $835.42 today. Roberto's marginal tax rate is 40%. For cost of equity, the company uses the CAPM based on SML. The risk-free rate in the market is 8% and the market rate of return is 14%. The company has a beta of 1.1. Roberto is experiencing a highly abnormal growth rate of 30%. This growth rate is expected to continue for four years. After year four, the growth rate is expected to return to a normal 8% and remain constant afterwards for the foreseeable future. Roberto just paid a dividend of $1.15. Furthermore, Roberto is evaluating several projects to invest in. The top project that is being considered will cost $1,000,000 and promises to pay $500,000 in year one, $400,000 in year two, $300,000 in year three and $100,000 in year four. This project will cease to exist with no salvage value at end of year four. So, the cash flow would look like the following: Year CF ($ in 000's) -1,000 (Initial Outlay) 500 400 300 100 Based on the information provided above, answer the following questions: 1. What is Roberto's cost of debt before taxes? a. 11% b. 12% c. 10% d. 8%

Answer 1

Issue price Coupon is o Bend = $835.42 rate = 9% R.a. Interest paid. Semi Anrually. Sective to Annual rate = (1+0.99) - i 0.092025 in effecture Interest nato I = 9.2025%. .: Interest Payment = $1000 x 9.20254 = $92.025 debt bebore Takes t of Ka = Interest Bond Payment x100 price 92.025 835.42 100 ten kdothely option a ut

OPTION a

Cost of debt before taxes = 11%.

Thank you :)

Rate my answer.