Gul Corp. considers the following capital structure optimal: 40% debt; 50% equit
ID: 2730816 • Letter: G
Question
Gul Corp. considers the following capital structure optimal: 40% debt; 50% equity; and 10% preferred stock. Gul’s bond currently sells in the market for $1150. The bond carries an annual coupon payment of 12 % of the face value which is paid in two semiannual payments. The bond will mature in 15 years and its face value is $1000. The bond's annual yield to maturity is 10.04%. The firm’s marginal tax rate is 40 percent. What is Gul's after-tax annual cost of debt?
cannot be determined without additional information
6.025%
10.04%
2.41%
5.021%
1.cannot be determined without additional information
2.6.025%
3.10.04%
4.2.41%
5.5.021%
Explanation / Answer
Rate = rate(nper,pmt,pv,fv) * 2
nper = 15*2 =30 semi annual payments
Pmt = 1000*12%*6/12 = $60
pv = -1150
fv = 1000
Rate = rate(30,60,-1150,1000) *2= 5.02180*2= 10.0436%
After tax - annual cost of debt = 10.0436%(1-40%) = 6.025 (approximately)
Therefore, option 2 is correct answer.
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