PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 24, Problem 26PS
Tax benefits Dorlcote Milling has outstanding a $1 million 3% mortgage bond maturing in 10 years. The coupon on any new debt issued by the company is 10%. The finance director, Mr. Tulliver, cannot decide whether there is a tax benefit to repurchasing the existing bonds in the marketplace and replacing them with new 10% bonds. What do you think? Does it matter whether bond investors are taxed?
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3. Jones Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago. The bond
currently sells for 93 percent of its face value. The Company's tax rate is 35%.
a. What is the pre-taxed cost of debt?
b. What is the after tax cost of debt?
c. Which is more relevant, the pre-tax or the after- tax cost of debt? Why?
In question 3 above, suppose the book value of the debt issues is $60 million. In addition, the
company has a second debt issue on the market, a zero coupon bond with 10 years to mature. The
book value of this issue is $35 million and the bond sell for 57 percent of par.
a. What is the company's total book value of debt?
b. The total market value?
c. What is your best estimate of the after-tax cost of debt now?|
Jones Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%.
1. What is the pre-taxed cost of debt?
2. What is the after tax cost of debt?
3. Which is more relevant, the pre-tax or the after- tax cost of debt? Why?
Jones Cricket Institute issued a 30 year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%.
a) What is the pre-taxed cost of debt? Answer
%
b) What is the after tax cost of debt? Answer
%
c) Which is more relevant, the pre-tax or the after- tax cost of debt? Why? Answer
In the question above, suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sell for 57 percent of par.
What is the company’s total book value of debt? $ Answer
The total market value? $ Answer
What is your best estimate of the after-tax cost of debt now? Answer
%
Chapter 24 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 24 - Bond terms Use Table 24.1 (but not the text) to...Ch. 24 - Bond terms Look at Table 24.1: a. The AMAT bond...Ch. 24 - Bond terms Select the most appropriate term from...Ch. 24 - Prob. 5PSCh. 24 - Bond terms Bond prices can fall either because of...Ch. 24 - Security and seniority a. As a senior bondholder,...Ch. 24 - Prob. 8PSCh. 24 - Prob. 9PSCh. 24 - Security and seniority a. Residential mortgages...Ch. 24 - Sinking funds For each of the following sinking...
Ch. 24 - Call provisions a. Look at Table 24.1. Suppose...Ch. 24 - Covenants Alpha Corp. is prohibited from issuing...Ch. 24 - Prob. 14PSCh. 24 - Private placements Explain the three principal...Ch. 24 - Convertible bonds True or false? a. Convertible...Ch. 24 - Convertible bonds Maple Aircraft has issued a 4%...Ch. 24 - Convertible bonds The Surplus Value Company had 10...Ch. 24 - Prob. 19PSCh. 24 - Convertible bonds Iota Microsystems 10%...Ch. 24 - Convertible bonds Zenco Inc. is financed by 3...Ch. 24 - Prob. 22PSCh. 24 - Prob. 23PSCh. 24 - Bank loans, commercial paper, and medium-term...Ch. 24 - Prob. 25PSCh. 24 - Tax benefits Dorlcote Milling has outstanding a 1...Ch. 24 - Convertible bonds This question illustrates that...Ch. 24 - Prob. 28PS
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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