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 1P
After-Tax Cost of Debt
Calculate the after-tax cost of debt under each of the following conditions:
- a. rd of 13%, tax rate of 0%
- b. rd of 13%, tax rate of 20%
- c. rd of 13%, tax rate of 35%
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Calculate the after-tax cost of debt under each of the following conditions:(a) Interest rate, 12%; tax rate, 25%.(b) Interest rate, 14%; tax rate,34%.(c) Interest rate, 15%; tax rate,40%.
Company issuing three year debt, and has come up with the following estimates of the value
of the interest tax shield and the probability of distress for different levels of debt:
PV of interest tax shield ($MM) $
Probability of Financial Distress
.
$0
0%
$
$25
0.4 $
0%
AMOUNT OF DEBT (SMM)
$60
1.1 $
$70
1.2 $
3%
5%
$50
0.9 $
1%
$80
1.4 $
8%
$90
1.6 $
20%
$100
1.8
33%
If in the event of distress, the present value of distress costs is equal to $15 million, then the
optimal level of debt for company:
A. $25 million
B. $50 million
C. $60 million
D. $70 million
Long-term debt can be reported either (a) as a single amount, net of any discount or increased by any premium or (b) at its face amount accompanied by a separate valuation account for the discount or premium. Any portion of the debt to be paid during the upcoming year, or operating cycle if longer, should be reported as a current amount. Regarding amounts to be paid in the future, what additional disclosures should be made in connection with long-term 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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- David Co has in issue 4% irredeemable debt quoted at $155 (ex-interest). The corporation tax rate is 35%.Required:-Calculate the return required by the debt providers and the cost ofdebt to David Co.arrow_forwardhow are the origination fees borne by the borrower accounted for in relation to the initial measurement of a loan receivable a. Added to initial measurement of the loa receivable b. Deducted from the initial measurement of the loan receivable c. Ignored d. Either added to or deducted from the initial measurement of the loean receivable if the origination fees are at leasr 10% of the proncipal amount of the loanarrow_forwardThe debt is amortized by the periodic payment shown Compute (a) the number of payments required to amortize the debt, (b) the outstanding principal at the time indicated Payment Interval 1 month Conversion Period quarterly Outstanding Principal After: dth payment Dobt Principal Debt Payment Interest Rate $17.000 $1.265 6% (a) The number of payments required to amortize the debt is (Round up to the nearest integer.) (b) The outstanding principal is s (Round the final answer to the nearest cent as needed Round all intermediate values to six decimal places as needed)arrow_forward
- An amortization of a debt is in a form of a gradient series of ₱5,000 on the first year, ₱4,500 on the second year, ₱4,000 on the third year, ₱3,500 on the fourth year. Determine future amount of the amortization if interest is 5%. Ans. ₱18,449.37arrow_forwardAn amortization of a debt is in a form of a gradient series of P10,000 on the first year, P9,500 on the second year, P9,000 on the third year, P8,500 on the fourth year. Determine the future amount of the amortization if interest is 0.12.arrow_forwardThe debt is amortized by the periodic payment shown Compute (a) the number of payments required to amortize the debt, (b) the outstanding principal at the time indicated Debt PrincipalDebt Payment Payment Interval Conversion Period monthly Outstanding Principal After: 6th payment Interest Rate $16,000 $1,419 3 months 6% (a) The number of payments required to amortize the debt is Round up to the nearest integer.) (b) The outstanding principal is S (Round the final answer to the nearest cent as needed Round all intermediate values to six decimal places as needed).arrow_forward
- The debt is amortized by equal payments made at the end of each payment interval. Compute (a) the size of the periodic payments; (b) the outstanding principal at the time indicated; (c) the interest paid by the payment following the time indicated; and (d) the principal repaid by the payment following the time indicated for finding the outstanding principal. Repayment Period Рayment Interval Outstanding Principal After: 8th payment Conversion Debt Principal Interest Rate Period $15,000 8 years 3 months 10% quarterly (a) The size of the periodic payment is $. (Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.) (b) The outstanding principal after the 8th payment is $ (Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.) (c) The interest paid by the 9th payment is $ (Round the final answer to the nearest cent as needed. Round all intermediate values to six…arrow_forwardTo calculate the after-tax cost of debt, multiply the before-tax cost of debt by(1 – T) . Andalusian Limited (AL) 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%. AL’s after-tax cost of debt is 7.28% (rounded to two decimal places). At the present time, Andalusian Limited (AL) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,050.76 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 AL 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.) 7.84% 5.88% 6.53% 5.22%arrow_forwardThe debt is amortized by the periodic payment shown. Compute (a) the number of payments required to amortize the debt; (b) the outstanding principal at the time indicated. Debt Principal Debt Payment Payment Interest Rate Interval Conversion Period Outstanding Principal After: $14,000 $832 3 months 12% monthly 7th payment (a) The number of payments required to amortize the debt is 24 I (Round up to the nearest integer.) (b) The outstanding principal is $ (Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.)arrow_forward
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What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY