Answer:
40.43% debt financed; 6.89% after-tax cost of debt
Explanation:
In order to determine the portion of the firm financed by debt ,we need first of all ascertain the market value of the company
Market value of the firm=market value of equity+market value of debt
market value of equity=$35 million
market value of debt=$25 million*$950.12/$1000=$23.75 million
market value of firm=$ 23.75 million+$35 million= $58.75 million
portion of debt finance=market value of debt/firm's value
=23.75/ 58.75 =40.43%
The after tax cost =pretax cost of debt*(1-t) where t is the tax rate of 30%
pretax cost of debt is the same yield to maturity computed using rate formula in excel
=rate(nper,pmt,-pv,fv)
nper is the number of times the bond would pay interest which is nine times
pmt is the annual interest payment=$25 million*9%=$2.25 million
pv is the current price of the bond=$23.75 as shown above
fv is the face value of $25 million
=rate(9,2.25,-23.75,25)=9.86%
after tax cost of debt=9.86%
*(1-0.3)=6.89%
