-Neotech Corporation\'s 14 percent coupon rate, semiannual payment, 1,000 par va
ID: 2666539 • Letter: #
Question
-Neotech Corporation's 14 percent coupon rate, semiannual payment, 1,000 par value 30-year bonds currently sell at a price of $1,353.54. If Neotech's marginal tax rate is 40 percent, what is its after-tax cost of debt?-Magnificent Metal Mining (MMM) expects to generate $60,000 in earnings that will be retained for reinvestment in the firm this year. If MMM's capital structure consists of 25 percent debt and 75 percent common equity, stated in total funds, what is the weighted average cost of capital (WACC) break point that is associated with retained earning's?
Explanation / Answer
1) According to the given information, Face value = $1000 Years to maturity = 30 Periods to maturity = 30 * 2 = 60 periods Coupon rate = 14% Semi-annual coupon rate = 7% Current price = $1,353.54 Tax rate = 40% Semi-annual coupon payment = Face value * Semi-annual coupon rate = $1000 * 7% = $70 Computing the yield to maturity using excel sheet: Step1: Go to excel and click "insert" to insert the function. Step2: Select the "Rate" function as we are finding the cost of debt or yield in this case. Step3: Enter the values as Nper = 60;PMT = -70; PV = 1353.54; FV = -1000 Step4: Click "OK" to get the desired value. The value comes to "5.10%" Therefore, the semi-annual cost of debt is 5.10% Annual pre-tax cost of debt is 10.2% Computing the after-tax cost of debt: After-tax cost of debt = Pre-tax cost of debt (1 - Tax rate) = 0.102 (1 - 0.40) = 0.0612 or 6.12% Therefore, the after-tax cost of debt is 6.12% Only one question should be posted. Multiple questions should not be posted. Thank You.Related Questions
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