1) You are given the following information for Lightning Power Co. Assume the co
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Question
1)
You are given the following information for Lightning Power Co. Assume the company’s tax rate is 40 percent.
5,000 7.2 percent coupon bonds outstanding, $1,000 par value, 30 years to maturity, selling for 108 percent of par; the bonds make semiannual payments.
22,000 shares of 3 percent preferred stock outstanding, currently selling for $82 per share.
2) Mudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 20 years to maturity that is quoted at 109 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually.
What is the company’s pretax cost of debt? (Do not round intermediate calculation and round your answer to 2 decimal places. (e.g., 32.16))
If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
%
Debt:5,000 7.2 percent coupon bonds outstanding, $1,000 par value, 30 years to maturity, selling for 108 percent of par; the bonds make semiannual payments.
Common stock: 440,000 shares outstanding, selling for $62 per share; the beta is 1.05. Preferred stock:22,000 shares of 3 percent preferred stock outstanding, currently selling for $82 per share.
Market: 11 percent market risk premium and 5.20 percent risk-free rate.Explanation / Answer
7.2% semi annual coupon 5000 bonds of 1000 each for 30 years selling at 1080 interest per period 3.60% Interest amount per period per bond 36 period 60 Selling price 1080 Pv of bond=int amount *(PVA 1$,r%,nperiod)+redemption value*(PV 1$,r%,nperiod) 1080=36*(PVA 1$,r%,60)+1000*(PV 1$,r%,60) By solving this r=3.29% Yearly interest rate=3.29*2=6.58% Post tax debt is 6.58%*(1-.35) 4.28% 6% annual coupon 1000 each for 20 years selling at 1090 interest per period 3.00% Interest amount per period per bond 60 period 20 Selling price 1090 Pv of bond=int amount *(PVA 1$,r%,nperiod)+redemption value*(PV 1$,r%,nperiod) 1090=30*(PVA 1$,r%,20)+1000*(PV 1$,r%,20) By solving this r=5.26% Post tax debt is 5.26%*(1-.35) 3.42%
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