Question

PROBLEMS 11. (After-tax COST O CARTAL 210 After-tax cost of debt Calculate the after-tax c ode under each of the following con A tax rate of 37, and a yield to maturity of 754 b. A tax rate 125, and a pre-tax cost of debt of 102 A tax rate of O, and a yield to maturity of 79 After-tax cost of debt) Melbourne, Inc. currently has 3 bonds with a to maturity of in the 35% marginal tax rate, what is its after-tax cost of debt? After-tax cost of debt) FitBite, Inc. Currently has an outstanding bond that pays interest annually. a coupon rate of 6% priced at $1,050, and 5 years until maturity. If it is in the 39% marginal tas what is its after-tax cost of debt? What is the after-tax cost of debt if it pays interest arma (Cost of preferred stock) A company parys an annual perpetual dividend of $3.00 on its preserved stock that is current valued at $4556. What is its after-tax cost of preferred stock? (Cost of preferred stock, wlflotation A n y plans to pay an annual perpetual dividend of walued at $45. itaces a 5% foton GO $2.00 on its newly issued preferred stock that on this issue, what is its after-tax cost of preferred stock? en stock priced at $756 pays an annual (Cost of common stock, retained emines dividend of $2.50 which is expected to growth indefinitely at 5% annually. What is its componen cost of capital? What is the investor's opportunity cost? 16. 17. (Cost of common stock, retained eminescu Ine's common stock has a beta coefficient of 1.5. The market risk premium is 5% and the riskie rate of interest is 1.5% What is CJ's component cost of common equity? 18. (Cost of common stock, retained earning m ond Ine's common stock has a beta coefficient of 1.0. The expected return of market 12 and the risk free rate of interest is 1.5%. What is Lemmond's component cost of common equity? 19. (Cost of equity w/Flotation) A common stock priced at $78.56 pays an annual dividend of $2.50 which is expected to growth indefinitely at 5% annually, What is its component cost of capital is it faces a 2 flotation cost? 20. (Cost of debt) Mouton Limited, Inc faced an after-tax cost of debt of 3A and a yield to maturity of 5%. What is its marginal tax rate? 21. (Cost of debt) Mouton Limited, Inc faced an after-tax cost of debt of 8.4 and a yield to maturity of 10.0%. What is its marginal tax rate? 22. (Cost of common stock, retained earnings) Most Def, Ind's common stock has a beta coefficient of 1.5. The market risk premium is 8% and the risk-free rate of interest is 1.5%. Most Def pays $0.65 of cash dividend each quarter for each share of common stock, priced at $75 per share. Dividends are expected to remain constant in the future. a. What is MostDef's component cost of common equity using the dividend discount model? b. What is Most Def's component cost of common equity using the CAPM? c. Compute the arithmetic mean of the two costs from parts a, and b. Provide an argument for using each of the three estimates as its component cost. 23. (WACC) MacD has two components of capital, common stock and corporate bonds. Its capital mix is like that of its competitors at 5% bonds and 95% common stock. It has a 5.1% pre-tax cost of debt and a 12% cost of equity. If MacD is in the 35% marginal tax rate, what is its weighted average cost of capital?

Answer 1

11.

There are 2 methods to estimate the before-tax cost of debt:

1) Yield to Maturity Approach (YTM)

2) Debt rating approach

In this problem, we will estimate before-tax cost of debt using YTM approach

a)

Yield to Maturity = 7.9%

Tax Rate = 37%

After-tax cost of debt = 7.9% * (1-0.37) = 4.97%

b)

Pre-tax cost of debt = 10.2%

Tax Rate = 25%

After-tax cost of debt = 10.2% * (1-0.25) = 7.65%

c)

YTM = 7.9%

Tax Rate = 0%

Hence, After-tax cost of debt = 7.9%