Question

I just need the answer for Question 4 please.

Common stock: 100,000 shares outstanding. $40 per share, beta-1.3 Bonds: 1,000 bonds outstanding, $1,000 face value each, 6% coupon paid semiannually, 19 years to maturity, market price of $1,305 per bond. Market risk premium=4.5%, yield on 30 day Treasury Bill= .5%, marginal tax rate 34% Question 1 (0.5 points) What is Rex Inc's Weight of Debt? Question 2 (0.5 points) What is Rex Inc's Weight of Equity? Question 3 (1 point) What is Rex Inc's Before Tax Cost of Debt? Question 4 (1 point) What is Rex Inc's After Tax Cost of Debt?

Answer 1

Market Value of Equity = Market share price * shares outstanding = $40 * 100,000 = $4,000,000

Market Value of Debt = Market Bond Price * No. of bonds outstanding = $1,305 * 1,000 = $1,305,000

Total Market Value = Market Value of Equity + Market Value of Debt

= $4,000,000 + $1,305,000 = $5,305,000

1). Weight of Debt = Market Value of Debt / Total Market Value

= $1,305,000 / $5,305,000 = 0.2460, or 24.60%

2). Weight of Equity = Market Value of Equity / Total Market Value

= $4,000,000 / $5,305,000 = 0.7540, or 75.40%

3). To find the before-tax cost of debt, we need to put the following values in the financial calculator:

N = 19*2 = 38;

PV = -1305;

PMT = (6% / 2)*1000 = 30;

FV = 1000;

Press CPT, then I/Y, which gives us 1.87

Periodic Rate = 1.87%

Before-tax cost of debt = Periodic Rate * No. of compounding periods in a year

= 1.87% * 2 = 3.74%

4). After-tax cost of debt = Before-tax cost of debt * (1 - t) = 3.74% * (1 - 0.34) = 2.47%