Question 3 4 pts A firm has issued $45 million in long-term bonds that now have

ID: 1175301 • Letter: Q

Question

Question 3 4 pts A firm has issued $45 million in long-term bonds that now have 12 years remaining until maturity. The bonds carry an 9% annual coupon and are-selling in the market for $1220.74. The firm also has $50 million in market value of common stock. For cost of capital purposes, what portion of the firm is debt financed and what is the after-tax cost of debt, if the tax rate is 35%? 47.65% debt financed; 5.85% after-tax cost of debt O 52.35% debt franced; 4.12% after-tax cost of debt 90.00% debt financed: 3.17% after-tax cost of debt 47.37% debt financed; 2.06% after-tax cost of debt

Explanation / Answer

Correct option is > 52.35% debt financed; 4.12% after-tax cost of debt

WORKING:

Particulars

Market value

Weight = Market value / Total

Debt

54,933,300.00

52.35%

Equity

50,000,000.00

47.65%

Total

104,933,300.00

100.00%

Using financial calculator BA II Plus - Input details:

FV = Future Value / Face Value =

-$1,000.00

PV = Present Value =

$1,220.74

N = Total number of periods = Number of years x frequency =

PMT = Payment = Coupon / frequency =

-$90.00

CPT > I/Y = Rate per period or YTM per period =

6.3206

Convert Yield in annual and percentage form = Yield*frequency / 100 =

6.32%

After tax Cost of debt = YTM x (1-Tax) = Yeild x (1-35%) =

4.11%

Approximately, after tax debt cost = 4.12%