Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Chapter 10, Problem 8QE
To determine
Compute the plug to long-term debt to balance the
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An overview of a firm's cost of debt
To calculate the after-tax cost of debt, multiply the before-tax cost of debt by .
Three Waters Company (TWC) can borrow funds at an interest rate of 10.20% for a period of six years. Its marginal federal-plus-state tax rate is 25%. TWC’s after-tax cost of debt is (rounded to two decimal places).
At the present time, Three Waters Company (TWC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,495.56 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If TWC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.)
3.38%
2.35%
2.94%
3.53%
1. An overview of a firm's cost of debt
To calculate the after-tax cost of debt, multiply the before-tax cost of debt by
Three Waters Company (TWC) can borrow funds at an interest rate of 9.70% for a period of six years. Its marginal federal-plus-state tax rate is 25%.
TWC's after-tax cost of debt is
(rounded to two decimal places).
At the present time, Three Waters Company (TWC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have
a current market price of $1,329.55 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-
plus-state tax rate of 25%. If TWC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two
decimal places)? (Note: Round your YTM rate to two decimal place.)
5.48%
4.87%
7.00%
6.09%
For which capital component must you make a tax adjustment when calculating a firm's weighted average cost of capital (WACC)?
○ Debt
O Preferred stock
○ Equity
Omni Consumer Products Company (OCP) can borrow funds at an interest rate of 7.30% for a period of seven years. Its marginal federal-plus-state
tax rate is 25%. OCP's after-tax cost of debt is
(rounded to two decimal places).
At the present time, Omni Consumer Products Company (OCP) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These
bonds have a current market price of $1,136.50 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a
federal-plus-state tax rate of 25%. If OCP wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two
decimal places)? (Note: Round your YTM rate to two decimal place.)
○ 9.17%
O 6.88%
8.79%
O 7.64%
Chapter 10 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
Ch. 10 - Prob. 1QECh. 10 - The chapter encourages analysts to develop...Ch. 10 - Prob. 3QECh. 10 - Suppose you are analyzing a firm that is...Ch. 10 - Use the following hypothetical data for Walgreens...Ch. 10 - Prob. 6QECh. 10 - Prob. 7QECh. 10 - Prob. 8QECh. 10 - The Home Depot is a leading specialty retailer of...Ch. 10 - Prob. 10PC
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- For which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)? Equity Preferred stock Debt Water and Power Company (WPC) can borrow funds at an interest rate of 7.30% for a period of four years. Its marginal federal-plus-state tax rate is 25%. WPC’s after-tax cost of debt is 5.48% (rounded to two decimal places). At the present time, Water and Power Company (WPC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,092.79 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 8.57% 7.14% 5.71% 8.21%arrow_forwardFor which capital component must you make a tax adjustment when calculating a firm's weighted average cost of capital (WACC)? O Debt O Equity O Preferred stock Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 9.70% for a period of four years. Its marginal federal-plus-state tax rate is 40%. WGC's after-tax cost of debt is (rounded to two decimal places). At the present time, Western Gas & Electric Company (WGC) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,229.24 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 40%. If WGC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) O 2.84% 2.56% O 3.41% 3.27%arrow_forwardAssume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if a. 100 percent debt is used? b. 100 percent common stock? (assume that the stockholders will accept 0.08)arrow_forward
- The Malia Corporation had sales in 2019 of $65 million, total asswets of $42 million, and total liabilities of $20 million. The interest rate on th company's debt is 6 percent and its tax rate is 21 percent. The operating profit margin was 12 percent. What were the company's operating profits and net income? What was the operating return on assets and return on equity? Assume that interest must be paid on all of the debt.arrow_forwardConsider two firms, Go Debt corporation and No Debt corporation. Both firms are expected to have earnings before interest and taxes of $100,000 during the coming year. In addition, Go Debt is expected to incur $40,000 in interest expenses as a result of its borrowings whereas No Debt will incur no interest expense because it does not use debt financing. Both firms are in the 21 percent tax bracket. Calculate the earnings after tax for both firms. Compare the difference in after-tax earnings to the difference in interest expense. Can you reconcile that difference?arrow_forwardGrateful Enterprises had the following income before tax provision and effective annual tax rate for the first three quarters of the current year: 1st Quarter - 5,000,000 (30%); 2nd Quarter - 6,000,000 (30%); 3rd Quarter- 7,000,000 (25%). What amount should be reported as income tax expense in the interim income statement for the third quarter? * Your answerarrow_forward
- You are given the following table showing the end of year net debt for a target firm. The cost of net debt is 8.2 percent, and the corporate tax rate is 21 percent. Calculate the present value of the tax shield generated in the four- year period. Year End of Year Net Debt O $81,347 O $26,898 O $21,624 O $102,970 0 $192,500 1 2 7 3 4 $207,000 $390,000 $455,000 $510,000arrow_forward2. An overview of a firm's cost of debt To calculate the after-tax cost of debt, multiply the before-tax cost of debt by (1-T). Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 11.10% for a period of six years. Its marginal federal-plus-state tax rate is 25%. WGC's after-tax cost of debt is 8.32% (rounded to two decimal places). At the present time, Western Gas & Electric Company (WGC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,495.56 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WGC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 2.94% 2.35% 2.65% 3.38%arrow_forwardb. Prepare a pro forma balance sheet for next year, using the information given and the judgmental approach. Include a reconciliation of the retained earnings account. ??? NOTE: Taxes payable for last year are about 19.6443% of last year's taxes on the income statement. The pro forma value is obtained by taking 19.6443% of next year's taxes. Complete the assets part of the pro forma balance sheet for next year: (Round to the nearest dollar.) Pro Forma Balance Sheet Provincial Imports, Inc. for Next Year (Judgmental Method) Cash $ Marketable securities Accounts receivable Inventories Total current assets $ Net fixed assets Total assets $arrow_forward
- For which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)? Equity Debt Preferred stock Water and Power Company (WPC) can borrow funds at an interest rate of 7.30% for a period of five years. Its marginal federal-plus-state tax rate is 25%. WPC’s after-tax cost of debt is (7.30, 5.21, 6.03, 5.48) (rounded to two decimal places). At the present time, Water and Power Company (WPC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,136.50 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 9.17% 8.79% 7.64% 6.11%arrow_forwardhe Wendt Corporation reported $30 million of taxable income. Its federal tax rate was 21% (ignore any possible state corporate taxes). What is the company's federal income tax bill for the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ Assume the firm receives an additional $4 million of interest income from some bonds it owns. What is the additional tax on this interest income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ Now assume that Wendt does not receive the interest income but does receive an additional $4 million as dividends on some stock it owns. Recall that 50% of dividends received are tax exempt. What is the additional tax on this dividend income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer…arrow_forwardThe Malia Corporation had sales in 2019 of $65 million, total assets of $42 million, and total liabilities of $20 million. The interest rate on the company’s debt is 6 percent and its tax rate is 21 percent. The operating profit margin was 12 percent. What were the company’s operating profits and net income? What was the operating return on assets and return on equity? Assume that interest must be paid on all of the debt.arrow_forward
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