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Marina CMI [18]
3 years ago
11

A firm has issued $25 million in long-term bonds that now have 9 years remaining until maturity. The bonds carry a 9% annual cou

pon and are selling in the market for $950.12. The firm also has $35 million in market value of common stock. For cost of capital purposes, what portion of the firm is debt financed and what is the after-tax cost of debt, if the tax rate is 30%? Group of answer choices 71.43% debt financed; 4.92% after-tax cost of debt 59.57% debt financed; 6.30% after-tax cost of debt 40.43% debt financed; 6.89% after-tax cost of debt 41.67% debt financed; 3.45% after-tax cost of debt
Business
1 answer:
tensa zangetsu [6.8K]3 years ago
6 0

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%

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When the world was struggling again during the great recession, my hero came back and changed the way IT industry again with the iPhone and the whole app culture. I am a little over 25, and I can tell that everything was very different when I was a small kid. You actually needed to read a newspaper and use encyclopedias (very large books).

Now everything is on the web and now most of us are even working using the internet. In just seconds we know what is happening in China or any other country in the world, while before all we heard about China was that were many Chinese and they were communists. IT has enabled whole new industries that boost the economy much more than any other manufacturing business ever had. The world would be a much different place if it wasn't for the Apple I, the internet or the iPhone.

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