Use the data provided on Cadbury to answer the question below. The risk free rat

Question

Use the data provided on Cadbury to answer the question below. The risk free rate is 4.25%. The expected return on the market portfolio is 9.75%. The corporate tax rate is 40%. The face value of Cadbury's outstanding bonds is 2.450 billion pounds sterling. The coupon rate on Cadbury's bonds is 4.5%. Assume that the bonds pay annual coupons. The yield to maturity on Cadbury's bonds is 4.5%. Cadbury's bonds mature in 7 years. Cadbury has 1.650 billion common shares outstanding. The market price of Cadbury's common shares as of Dec 31, 2008 is 6.25 pounds sterling. Cadbury's Beta is 0.8. What is Cadbury's cost of debt (afterminustax)? A. 4.50% B. 8.65% C. 8.70% D. 7.80% E. 2.70%

Explanation / Answer

Cadbury's cost of debt (afterminustax):

= Yield to maturity*(1-Tax rate)

= 4.50%*(1-40%)

= 4.50%*0.60

= 2.70%

Hence, correct option is E. 2.70%.

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