Optimist Company can sell common shares at $30 per share and can obtain debt funding at 8 percent. It has a marginal income tax rate of 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm's beta is 0.9. It has a targeted debt-to-equity ratio of 1:1. What is its after-tax cost of debt?

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
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Optimist Company can sell common
shares at $30 per share and can
obtain debt funding at 8 percent. It
has a marginal income tax rate of 25
percent. The yield on US Treasury
securities is 3 percent. The market
risk premium is 6.0 percent, and the
firm's beta is 0.9. It has a targeted
debt-to-equity ratio of 1:1. What is
its after-tax cost of debt?
Maximum number of characters
(including HTML tags added by text
editor): 32,000
Show Rich-Text Editor (and character
count)
Transcribed Image Text:Optimist Company can sell common shares at $30 per share and can obtain debt funding at 8 percent. It has a marginal income tax rate of 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm's beta is 0.9. It has a targeted debt-to-equity ratio of 1:1. What is its after-tax cost of debt? Maximum number of characters (including HTML tags added by text editor): 32,000 Show Rich-Text Editor (and character count)
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