11:34 AM Ooo Sprint F 91% ezto.mheducation.com C FIN 210 FIN 210 Fall 2015 Tuesd

Question

11:34 AM Ooo Sprint F 91% ezto.mheducation.com C FIN 210 FIN 210 Fall 2015 Tuesday FINANCE Question 2 (of 6) value 20.00 points Problem 13-5 Cost of Debt (LO2) Micro Spinoffs Inc. issued 20-year debt a year ago at par value with a coupon rate of 8%, paid annually. Today, the debt is selling at $1,100. If the firm's tax bracket is 20%, what is its percentage after-tax cost face value of $1,000. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) After-tax cost of debt Hints References eBook & Resources Hint #1 Check my work 2015 McGraw-Hill Education. All rights reserved

Explanation / Answer

After-Tax Cost of Debt = (1-Tax) { interest + (realisable value - net proceed)/number of years }

   (realisable value + net proceed) /2

   = (1 - 0.20) { $80 + ($1100 - $1000) / 20}

($1100 + $1000)/2

   = 0.8 * 0.081

   = 6.48%

Note: 20years Debt is issued that means it is a redeemable debt, Realisable value of debt will be of $1100.

And , Interest = $1000 * 8%

=$80

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