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kakasveta [241]
4 years ago
14

Baxter International Inc. can obtain funds for future investments through retained earnings, new issues of common stock, and iss

uance of debt. Baxter's stock currently sells for $18 per share, paid a dividend of $1.20 last year(D0=$1.20), has a growth rate of 6% that is expected to continue, and new issues carry flotation costs of7%. Baxter's bonds sell for $945, pays a 7% annual coupon, matures in 30 years, and new issues carry3% flotation costs. Baxter's tax rate is 30%.9.What is Baxter's after-tax cost of debt
Business
1 answer:
CaHeK987 [17]4 years ago
7 0

Answer:

The multiple choices are:

a. 7.72%  

b. 5.40%

c. 5.22%

d. 7.46%

e. 4.90%

Option B is the correct answer,5.40%

Explanation:

In order to determine the after tax cost of Baxter's debt,we need to first of all calculate the pretax cost of debt which is by applying the rate formula in excel.

=rate(nper,pmt,-pv,fv)

nper is the number of coupon payments the bond would make which is 30

pmt is the annual coupon interest on the bond=7%*$1000=$70

pv is the current price of the bond minus the flotation cost=$945*(1-3%)=$916.65

The fv is the face value of $1000 per bond

=rate(30,70,-916.65,1000)

pretax cost of debt=rate=7.72%

After tax cost of debt=pretax cost of debt*(1-t)

t is th tax rate of 30% 0or 0.30

after tax cost of debt=7.72%*(1-.3)=5.40%

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