1. What would be the before-tax cost of debt (rd) for a company that currently h

Question

1. What would be the before-tax cost of debt (rd) for a company that currently has 10-year, 12% annual coupon bonds outstanding? The bonds are currently selling in the market for $1,200 and have a $1,000 par value.

For the same company in question #1, what is the company’s after-tax cost of debt

[rd(1-T)]? The company recently reported that its EBT was $10,000,000 and its Net Income was $6,750,000.

If the company was planning to raise capital for a project that lasts ten years, what would be its cost of equity (rs) given the following information? The current on a 10-year Treasury Note is 4.5%, the historical return on the S&P 500 is 12%, and the company’s current beta () is 1.1.

Given the information found in questions 2 and 3; what would the company’s weighted average cost of capital be if the company had a Debt-to-Total Asset Ratio of 0.35, and no Preferred Stock has been issued?

Using the information found in questions 2 & 3, what would the company’s WACC be if 30% of their financing came from debt, 50% come from common equity, and the remainder come from preferred stock? The preferred stock has an $8 dividend and a market price of 95 dollars.

Explanation / Answer

The pretax cost of debt is 8.9%

Tax rare is 32.5%

Post tax cost of debt 6.0075%

Cost of equity is rf + beta × rm

17.7%

WACC is 0.35 × 6.0075 % + 0.65 ×17.7%

=2.10 % + 11.50

=13.6%

WACC with prefered stock,

Cost of prefered stock 8.42 %

WACC 0.3 × 6.0075% + 0.5×17,7% + 0.2×8.42%

1.8 + 8.85 + 1.68

=12.33%

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