KBefore-tax cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker hasinformed 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. (Clickon the icon here in order to copy the contents of the data table below into a spreadsheet.)Coupon rate6%Time to maturity15 yearsPremium or discount$290The before-tax cost of debt is %. (Round to two decimal places.)

To accurately determine the before-tax cost of debt, we need to solve for the yield to maturity…

Answered: K Before-tax cost of debt Gronseth…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Km for the following Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this compute the cost of capital for the a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.4 percent mat is paud semiannually. The bond is currently selling for a price of $1,121 and will mature in 10 years The firm's tax rate is 34 percent b. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company? A new common stock issue that paid a $174 dividend last year. The par value of the stock is $15, and the firm's dividends per share have grown at a rate of 81 percent per year. This growth rate is expected to continue into the foreseeable tuture The pnce of this stock is now $27 12 d. A preferred stock paying a 10.7 percent dividend on a $126 par value The preferred shares are currently selling for…
When market rates of interest decrease, the use of floating-rate debt benefits: Multiple Choice O O no one. investors. all parties. issuing companies. baved **********
Suppose Federal National Mortgage Association sells mortgage-backed securities (MBS) backed by a fixed-rate mortgage portfolio having the following features: Current mortgage balance $300,000,000 Weighted average coupon rate (WAC) = 6% Weighted average maturity (WAM) = 360 months Current prepayment speed = 300 PSA %3D Pass-through rate (PT Rate) = 5.4% What is the amount of total cash flows that the investors of the agency MBS receive in Month 2? Oa. $1,948,883.93 O b. $1,948,915.93 O c. $1,798,915.93 O d. $2,098,659.47
(Cost of debt) Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 10 percent with interest paid semiannually and a 10-year maturity. Investors require a rate of return of 9 percent. a. Compute the market value of the bonds. b. How many bonds will the firm have to issue to receive the needed funds? c. What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent?
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Loptech, a technology firm, wants to issue bonds for investment purposes. Loptech has one of the best credit ratings in the industry. Market rates for debt instruments average at .5% interest. Based on its credit rating, Loptech would likely sell bonds that pay _____. A. Indeterminable with current information B. 0.25% C. 0.5% D. 0.75%
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(Cost of debt) Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 14 percent and a maturity of 10 years. The investors require a rate of return of 9 percent. a. Compute the market value of the bonds b. What will the net price be if flotation costs are 10.5 percent of the market price? c. How many bonds will the firm have to issue to receive the needed funds? d. What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 21 percent? e. Rework the problem as follows: Assume a coupon rate of 8 percent. f. What effect does changing the coupon rate have on the firm's after-tax cost of capital? Why is there a change? GUD a. If the bond's annual coupon rate is 14%, what is the market value of the bond? (Round to the nearest cent.) b. What will the net price be if flotation costs are 10.5 percent of the market price? (Round to…
After-Tax Cost of Debt LL Incorporated's currently outstanding 10% coupon bonds have a yield to maturity of 7.8%. 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. %
Suppose that short-term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Required: Which gives you the higher after-tax yield if your combined tax bracket is: Higher After-Tax Yield a. Zero Municipal bond b. 10% Taxable bond c. 20% Municipal bond d. 30% Neither
The Chief Financial Officer of a company would like to raise money for new equipment by floating a new bond issue. The CFO would like to receive $1000 (full face value) for each of the bonds she sells. After collecting the below bond market data, and if the bonds carry a rating of A and have a term of 10 years, what coupon rate should be included in the bond contract? Assume an annual coupon payment. Security& Rating Maturity Face Coupon Price Treasury 1 $ 1,000 0.00% $ 965.00 Treasury 3 $ 1,000 1.90% $ 939.06 Treasury 5 $ 1,000 4.30% $ 932.42 Treasury 10 $ 1,000 6.80% $ 1,007.12 Treasury 15 $ 1,000 6.60% $ 908.25 CorpA A 5 $ 1,000 8.10% $ 990.00 CorpB BB 10 $ 1,000 7.90% $ 859.88 CorpC AA 15 $ 1,000 7.00% $ 660.00
Question content area top Part 1 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 $40 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 Time to maturity Premium or discount 11% 15 years $220

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