1. What would be the before-tax cost of debt (rd) for a company that currently h
ID: 2778158 • Letter: 1
Question
1. What would be the before-tax cost of debt (rd) for a company that currently has 10-year, 12% annual coupon bonds outstanding? The bonds are currently selling in the market for $1,200 and have a $1,000 par value.
For the same company in question #1, what is the company’s after-tax cost of debt
[rd(1-T)]? The company recently reported that its EBT was $10,000,000 and its Net Income was $6,750,000.
If the company was planning to raise capital for a project that lasts ten years, what would be its cost of equity (rs) given the following information? The current on a 10-year Treasury Note is 4.5%, the historical return on the S&P 500 is 12%, and the company’s current beta () is 1.1.
Given the information found in questions 2 and 3; what would the company’s weighted average cost of capital be if the company had a Debt-to-Total Asset Ratio of 0.35, and no Preferred Stock has been issued?
Using the information found in questions 2 & 3, what would the company’s WACC be if 30% of their financing came from debt, 50% come from common equity, and the remainder come from preferred stock? The preferred stock has an $8 dividend and a market price of 95 dollars.
Explanation / Answer
1.
Market Price = Present value of all coupon cash flows + Present value of the face value of the bond
Cost of Debt = Rd
1200 = Coupon rate*(1-1/(1+Rd)^n)/Rd + 1000/(1+Rd)^n
1200 = 120*(1-1/(1+Rd)^10)/Rd + 1000/(1+Rd)^10
At Rd = 8%
Present value of all cash proceeds = $1268.403
At Rd = 9%
Present value of all cash proceeds = $1192.53
Thus,
As per the method of interpolation
Rd = 8% + ((1268.403 – 1200)/(1268.403 – 1192.53))*(9%-8%)
Rd= 8.9%
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