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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Third Mortgage Investors makes money by purchasing mortgage backed securities (MBS), stripping them into interest only (IO) and principal only (PO) components, and selling the components for more than it paid for the original security. Suppose the company purchases a $100,000 Face value MBS carrying a coupon of 9 percent and a maturity of 30 years. Assume for the purpose of the following analysis, the MBS will make payments on an “ANNUAL BASIS.” What is the remaining principal balance on the MBS if it survives 1-year? 3-years? 5 years? 8 years?
Calculate the cost of capital of a bond selling to yeild 13% for the purchaser of the bond. The borrowing firm faces a tax rate of 34% a. 8.58% b. 10.58% c. 34% d. 13.58%
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Ee 375.
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…
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Suppose your company needs to raise $35.8 million and you want to issue 23- year bonds for this purpose. Assume the required return on your bond issue will be 8.3 percent, and you?re evaluating two issue alternatives: a 8.3 percent semiannual coupon bond and a zero coupon bond. Your company's tax rate is 35 percent. Requirement 1: (a) How many of the coupon bonds would you need to issue to raise the $35.8 million? (b) How many of the zeroes would you need to issue? Requirement 2: (a) In 23 years, what will your company's repayment be if you issue the coupon bonds? (b) What if you issue the zeroes? Requirement 3: Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the firm's aftertax cash outflows for the first year under the two different scenarios.
Task 3: CMBS (1) Why are bond rating agencies so vital in the MBS market? (2) Consider a $100 million loan pool, packaged, and sold in securities of $1,000 each. The loans in the pool have five years to run, a 9% interest rate, they are fully amortizing, and there is no prepayment or default. The loan servicing charge is 1.5% of the loan balance outstanding. a. If you want to offer a security at a yield of 10.5%, what is the price of the security? 6. for correct cash flows, 1 for correct price) b. What discount does that represent to the face value of the security? e, (3) A mortgage pool has $1 billion in par value. The senior (A) tranche has 30% credit support (subordination). The next tranche (B) has 25% credit support (subordination). a. How much par value (principal) was issued in the A tranche?? b. How much par value (principal) was issued in the B tranche? 1
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You are analyzing the after-tax cost of debt for a firm. You know that the firm's 12-year maturity, 11.00 percent semiannual coupon bonds are selling at a price of $1,229. Assuming that these bonds are the only debt outstanding for the firm. Problem 13.19 a1-a3(a1) Your answer is correct. What is the current YTM of the bonds? (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.) YTM eTextbook and Media Problem 13.19 a1-a3(a2) Your answer is incorrect. 8 % After-tax cost of debt What is the after-tax cost of debt for this firm if it has a marginal tax rate of 34 percent? (Round final answer to 2 decimal places, e.g. 15.25%.) Attempts: 1 of 3 used %

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