1) Calculate the after-tax cost of debt under each the following conditions: a)

Question

1)   Calculate the after-tax cost of debt under each the following conditions:

a) Interest rate of 9%, tax rate 0%                      

b) Interest rate of 9%, tax rate of 20%                                                   

c) Interest rate of 9% tax rate of 35%

2) Burnwood Tech plans to issue some $60.00 par preferred stock with a 6%. The similar stock is selling the market for $70.00. Burnwood must pay flotation costs of 5% of the issue price. What is the all-in cost (i.e. effective rate it must pay) of the preferred stock to the company?

3) Summerdahl Resort’s common stock is currently traded at $36.00 a share. The company paid a dividend of $3.00 per share this year and the dividend expected to grow at a constant rate of 5% by year. What is the cost of common equity?

4) A company’s 6% coupon rate, semiannual payment, $1000 par value matures in 30 years sells at a price of $815. The company’s marginal federal plus state tax rate is 40%. What would be the estimated after tax cost of debt to the company for the purpose of calculating the WACC?

5) The earnings, dividends, and the stock price of Shelby, Inc. are expected to grow at 7% per year in the future. Shelby’s common stock sells for $29.00 a share, its last dividend (D0) was $2.00. The company's marginal tax rate is 40%

a) Using the discounted cash flow approach, what is the cost of the equity?                           

b) If the firm’s bonds have a current yield to maturity of 12%, what would be its cost of debt capital? (ignore any floatation costs)

c) On the basis of the results of parts (a) and (b) , what would be your estimate of Shelby’s weighted average cost of capital if it projects using a mix of 60% equity and 40% debt to finance its operations?

Explanation / Answer

1. after tax cost of debt = pre tax cost of debt*(1-tax rate)

a. pre tax cost of debt = 9% and tax rate = 0%.

after tax cost of debt = 9%*(1-0%) = 9%.

b. pre tax cost of debt = 9% and tax rate = 20%

after tax cost of debt = 9%*(1-20%) = 80% of 9% = 7.2%

c. pre tax cost of debt = 9% and tax rate = 35%

after tax cost of debt = 9%*(1-35%) = 65% of 9% = 5.85%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.