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CaHeK987 [17]
3 years ago
10

Lamey Co. has an unlevered cost of capital of 10.9 percent, a tax rate of 35 percent, and expected earnings before interest and

taxes of $21,800. The company has $25,000 in bonds outstanding that sell at par and have a coupon rate of 6 percent. What is the cost of equity?
Business
1 answer:
mart [117]3 years ago
6 0

Answer:

cost of equity is 11.60 %

Explanation:

Given data

cost of capital = 10.9 percent

tax rate = 35 percent

earnings = $21,800

bonds outstanding = $25,000

rate = 6 %

to find out

cost of equity

solution

we will find first value of unlevered

value of  unlevered  = earning ( 1 - tax rate ) / cost of capital

value of  unlevered  = 21800 ( 1 - 0.35 ) / 0.109 = $130000

so

value of  unlevered will be for firm = 130000 × bond outstanding × tax rate

value of  unlevered will be for firm = 130000 × 25000 × 35%

value of  unlevered will be for firm = $138750

so value of firm will be = bond outstanding + equity

so equity will be = 138750 - 25000

equity = $113750

so now

cost of equity will be = cost of capital + ( cost of capital - rate) (bonds / equity ) ( 1 - tax rate )

cost of equity will be = 10.9%+ ( 10.9 % - 6%) (25000 / 113750 ) ( 1-0.35)

so cost of equity = 11.60 %

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Collins Company borrowed $1,250,000 from BankTwo on January 1, 2016 in order to expand its mining capabilities. The five-year no
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Answer:

Collins Company must recognize $118,750 (which is annual interest paid on the capital) in its 2017 income statement as an expense item if the method of computing the interest is the flat rate method.

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Explanation:

According to the principles of Financial Accounting, the interest portion of any loan must be entered as an expense item. The portion of the principal being paid back is recorded as part of the liability of the company in the period under consideration. It often goes by the term Loan Payable or Notes Payable.

Hence to arrive at the answers given above, you must note that the year in question is 2017 and that the loan took effect from January 2016.

When computing for interest payable, two methods may be used:

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That is, $1,250,000 x 9.5% x 5 = Total Interest Rate Applicable.

= $593,750 so going by this method, the interest rate to be entered is

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That is, [Initial Capital-Annual Payments] *9.5%

For year 2016, annual payment will be Zero. Given that the loan started in that year. In 2017 however, the annual payment will apply as shown below:

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