Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Question
Chapter 13, Problem 4QAP
Summary Introduction
Adequate information:
Book value of debt issue
Book value of zero-coupon bond issue
Market value over book value for debt issue (A) = 68%
Market value over book value for zero-coupon bond issue (B) = 106%
Face value = $1,000
Price = $680
Term duration = 9 years
Number of compounding periods in a year = 2
Tax rate = 22%
To compute: Total book value of debt, the total market value of debt, and after-tax cost of debt.
Introduction: Cost of debt refers to the interest payments made by the borrower on the debt such as bonds.
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Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%.
a. What is the value of the debt at Date 0? What is the value of the equity at Date 0?
b. Suppose the government announces that it guarantees the company’s payment to the debtholders. How much is the government guarantee worth?
7. Calculating Cost of Debt For the firm in Problem 6, suppose the book
value of the debt issue is $135 million. In addition, the company has a
second debt issue, a zero coupon bond with 12 years left to maturity; the
book value of this issue is $65 million, and it sells for 64.3 percent of par.
LO 2
What is the total book value of debt? The total market value? What is the
aftertax cost of debt now?
Consider a two-date binomial model. A company has both debt and equity in its capital structure. The value of the company is 100 at Date 0. At Date 1, it is equally like that the value of the company increases by 20% or decreases by 10%. The total promised amount to the debtholders is 100 at Date 1. The riskfree interest rate is 10%.
a. What are the possible payoffs to the equityholders at date 1? What kind of financial product has the same payoffs? Please describe the detailed characteristics of the financial product.
b. What are the possible payoffs to the bondholders at date 1? Are they riskfree? What kind of financial product/portfolio has the same payoffs? Please describe the detailed characteristics of the financial product/portfolio.
Chapter 13 Solutions
Corporate Finance
Ch. 13 - Project Risk If you can borrow all the money you...Ch. 13 - WACC and Taxes Why do we use an aftertax figure...Ch. 13 - SML Cost or Equity Estimation If you use the stock...Ch. 13 - SML Cost or Equity Estimation What are the...Ch. 13 - Prob. 5CQCh. 13 - Cost of Capital Suppose Tom OBedlam, president of...Ch. 13 - Company Risk versus Project Risk Both Dow Chemical...Ch. 13 - Prob. 8CQCh. 13 - Leverage Consider a levered firms projects that...Ch. 13 - Beta What factors determine the beta of a stock?...
Ch. 13 - Prob. 1QAPCh. 13 - Prob. 2QAPCh. 13 - Prob. 3QAPCh. 13 - Prob. 4QAPCh. 13 - Prob. 5QAPCh. 13 - Prob. 6QAPCh. 13 - Prob. 7QAPCh. 13 - Prob. 8QAPCh. 13 - Prob. 9QAPCh. 13 - Prob. 10QAPCh. 13 - Prob. 11QAPCh. 13 - Prob. 12QAPCh. 13 - Prob. 13QAPCh. 13 - Prob. 14QAPCh. 13 - Prob. 15QAPCh. 13 - Prob. 16QAPCh. 13 - Prob. 17QAPCh. 13 - Prob. 18QAPCh. 13 - Prob. 19QAPCh. 13 - Prob. 20QAPCh. 13 - Prob. 21QAPCh. 13 - Prob. 22QAPCh. 13 - Prob. 23QAPCh. 13 - Prob. 24QAPCh. 13 - Prob. 1MCCh. 13 - Prob. 2MCCh. 13 - Go to www.reuters.com and find the list of...Ch. 13 - You now need to calculate the cost of debt for...Ch. 13 - You now have all the necessary information to...Ch. 13 - You used Tesla as a representative company to...
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