Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 11, Problem 2P
Summary Introduction
To calculate: The after-tax cost of debt
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After-Tax Cost of Debt
LL Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 8.3%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is LL's after-tax cost of debt? Round your answer to two decimal places.
The Holmes Company's currently outstanding bonds have an 8% coupon and a 14% yield to maturity. Holmes believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is Holmes' after-tax cost of debt? Round your answer to two decimal places.
___%
The Holmes Company’s currently outstanding bonds havean 8% coupon and a 10% yield to maturity. Holmes believes it could issue new bonds atpar that would provide a similar yield to maturity. If its marginal tax rate is 40%, what isHolmes’ after-tax cost of debt?
Chapter 11 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 11 - Define each of the following terms:
Weighted...Ch. 11 - Prob. 2QCh. 11 - Prob. 3QCh. 11 - Distinguish between beta (i.e., market) risk,...Ch. 11 - Suppose a firm estimates its overall cost of...Ch. 11 - 11-1 After-Tax Cost of Debt
Calculate the...Ch. 11 - Prob. 2PCh. 11 - Cost of Preferred Stock
Duggins Veterinary...Ch. 11 - Prob. 4PCh. 11 - Prob. 5P
Ch. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Bond Yield and After-Tax Cost of Debt A companys...Ch. 11 - Prob. 10PCh. 11 - Prob. 11PCh. 11 - Calculation of gL and EPS Spencer Suppliess stock...Ch. 11 - The Cost of Equity and Flotation Costs
Messman...Ch. 11 - Prob. 14PCh. 11 - WACC Estimation
On January 1, the total market...Ch. 11 - Prob. 16PCh. 11 - During the last few years, Jana Industries has...Ch. 11 - What is the market interest rate on Jana’s debt,...Ch. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Prob. 5MCCh. 11 - Prob. 6MCCh. 11 - Prob. 7MCCh. 11 - Prob. 8MCCh. 11 - Prob. 9MCCh. 11 - Prob. 10MCCh. 11 - What procedures can be used to estimate the...Ch. 11 - Prob. 12MCCh. 11 - Prob. 13MCCh. 11 - Prob. 14MCCh. 11 - What four common mistakes in estimating the WACC...
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- LL Incorporated's currently outstanding 10% coupon bonds have a yield to maturity of 7.5%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is LL's after-tax cost of debt? Round your answer to two decimal places. ________ %arrow_forwardLadder Works has debt outstanding with a coupon rate of 6 percent and a yield to maturity of 6.8 percent. What is the aftertax cost of debt if the tax rate is 21 percent? Assume all interest is tax deductible. 5.62% 5.82% 5.37% 4.86%arrow_forwardLL Incorporated’s currently outstanding 7 percent coupon bonds have a yield to maturity of 6 percent. LL believes it could sell new bonds that would provide a similar yield to maturity. If its marginal tax rate is 34 percent, what is LL’s after-tax cost of debt? Express your answer in percentage (without the % sign) and round it to two decimal places.arrow_forward
- The coupon rate on an issue of debt is 8%. The yield to maturity on this issue is 10%. The corporate tax rate is 21%. What would be the approximate after-tax cost of debt for a new issue of bonds?arrow_forwardConsider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7, what is the cost of equity, RS?arrow_forwardHome Depot has debt outstanding with a face value of $30 billion. The coupon rate on these bonds is 6.2%. The current yield-to-maturity (YTM) on these bonds is 7.8%. Home Depot's tax rate is 26%. What is the effective cost of debt of Home Depot? OA. 9.83% OB. 6.20% OC. 4.59% OD. 5.77% OE. 7.80%arrow_forward
- What is the yield to maturity on Fox Inc.'s bonds if its after-tax cost of debt is 9% and its tax rate is 34%? 9% 13.64% 26.47% 5.94%arrow_forward2. Notable Nothings plans to issue new bonds with the same yield as its existing bonds. The existing bonds have a coupon rate of interest equal to 5.6% (semiannual interest payments), 12 years remaining until maturity, and a $1,000 maturity value; they are currently selling for $918 each. a. If Notable issues new bonds today, what will be its before-tax cost of debt? b. What will be its before-tax cost of debt if the price of its existing bonds is $730 when Notable issues the new bonds?arrow_forwardBefore-tax cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $30 per bond. Calculate the before-tax cost of financing with the following alternative. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Coupon rate 9% The before-tax cost of debt is%. (Round to two decimal places.) Time to maturity 16 years Premium or discount $250arrow_forward
- Before-tax cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $30 per bond. Calculate the before-tax cost of financing with the following alternative. (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) The before-tax cost of debt is %. (Round to two decimal places.) Coupon rate 6% Time to maturity 17 years Premium or discount $270arrow_forwardA firm has an outstanding bond paying a coupon rate of 12%. The firm's tax rate is 34%. If the yield-to-maturity on the bond is 6.18%, what is the firm's after-tax cost of debt? Select one: A. 12.00% B. 4.08% C. 7.92% D. 6.18%arrow_forwardThe coupon rate on an issue of debt is 9%. The yield to maturity on this issue is 10%. The corporate tax rate is 35%. What would be the approximate after-tax cost of debt for a new issue of bonds? (Round your answer to decimal places.)arrow_forward
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