Question

2. An overview of a firm's cost of debt

For which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)?

Preferred stock

Equity

Debt

Andalusian Limited (AL) can borrow funds at an interest rate of 7.30% for a period of eight years. Its marginal federal-plus-state tax rate is 25%. AL’s after-tax cost of debt is     (rounded to two decimal places).

At the present time, Andalusian Limited (AL) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,329.55 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If AL wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.)

6.09%

4.87%

5.48%

7.31%

Answer 1

Q. I Solutions @ Delt. The calculation of WACC involves calculating the weighted average of the required rates of return on delt and equity where the weights equal the pucentage of each type of financing in the fims's overall capital structure 6. 5.48 % [ After tax YTM=7307.X(1-as) = 5.48% YTM is the expectation of the investor ie cate of raun of return that the investor would earn if the Bond is brought at its Current MP od is held till maturity Note : we have not formula ie YTM = c + used the y TM FV-MP since (EVEM usiness Revad hy

the expectation of the investors or cost of raising debt for the would be 5.48% af tu tar ] the company