1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
Nonamiya [84]
3 years ago
14

Garnet Corporation is considering issuing risk-free debt, or risk-free preferred stock. The tax rate on interest income is 35%,

and the tax rate on dividends or capital gains from preferred stock is 15%. However, the dividends on preferred stock are not deductible for corporate tax purposes, and the corporate tax rate is 40%.
a. If the risk-free interest rate for debt is 6%, what is cost of capital for risk-free preferred stock?
b. What is the after-tax debt cost of capital for the firm? Which security is cheaper for the firm?
c. Show that the after-tax debt cost of capital is equal to the preferred stock cost of capital multiplied by (1 −τ*).
Business
1 answer:
adell [148]3 years ago
4 0

Answer:

Explanation:

a) investors wil receive 6% x ( 1-0.35)

= 3.9% risk free debt  after tax.

After  tax  return from risk free  preferred stock earnings must be equal.

to evaluate the cost of capital  fro preferred stock = 3.9%/(1-0.15)

                                                                                    = 4.59%

b) the after-tax debt cost of capital = 6% x (1- 0.40)

= 3.60%.

therefore, 3.60% is cheaper than the 4.59% preffered stoch cost per capital

c)  r* = 1 - [{(1 - 0.40)(1 - 0.15)} / (1 - 0.35)] = 1 - 0.7846 = 0.2154, or 21.54%

Hence, 4.59% x (1 - 0.2154) = 3.60%

You might be interested in
The kind of money used by a group or nation.
kotegsom [21]
The kind of money used by a group or nation is usually considered currency. Currency can be denominated in paper or coin money, but most currency today exists in bank balances throughout the world in non-physical (exists only on a computer or in a bank ledger) rather than in its physical form. 
5 0
3 years ago
Read 2 more answers
Consider two scenarios for a nation's economic growth. Scenario A has real GDP growing at an average annual rate of 3.5 percent;
WARRIOR [948]

Answer:

20 years (scenario A) and 16 years (scenario B)

Explanation:

The real GDP will double in "n" number of years, with "n" estimated by interpolation using the formula below.

current GDP * (1+Growth Rate)^{n} = 2 * current GDP

In the solutions below, we assumed current GDP to be 1, and as a result, the GDP will double to 2.

Scenario A

1 * (1+0.35)^{n} =2

When you substitute 20 for "n" in the left hand side (LHS) of the equation, you will arrive at 1.99 which is approximately equal to 2. Any number below 20 will result in a number less than 2.

Thus, with an average annual real GDP growth rate of 3.5%, real GDP will double in about 20 years.

Scenario B

1 * (1+0.45)^{n} =2

When you substitute 16 for "n" in the left hand side (LHS) of the equation, you will arrive at 2.02 which is approximately equal to 2. Any number below 16 will result in a number less than 2.

Thus, with an average annual real GDP growth rate of 4.5%, real GDP will double in about 16 years.

6 0
3 years ago
Problem 5-35 Comparing Cash Flow Streams [LO 1] You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They
Minchanka [31]

Answer:

PV of 1st option = $185,015.50

PV of 2nd option = $192,683.78

Explanation:

Computing the present value of the monthly payments, we use the formula PV = \frac{A(1-(1+r)^{-n}) }{r}

Where PV = present value of the monthly payments

A = monthly salary

r = monthly interest rate = 6%/12 = 0.5% = 0.005

n = number of months = 24 months

PV of the 1st option, $8,200 monthly for the next 2 year

PV = \frac{8,200(1-(1.005)^{-24}) }{0.005} = $185,015.50.

PV of the 2ns option, $6,900 monthly + $37,000 signing bonus

PV = \frac{6,900(1-(1.005)^{-24}) }{0.005}+37,000 = $155,683.78 + $37,000 = $192,683.78.

7 0
3 years ago
To qualify for the quantity discount, which of the following may not be joined together under the definition of any person?
Sedaia [141]

Answer:

C. Father and his 35-year-old son investing in separate account.

Explanation:

Quantity discount when offered relates to one particular account, and not multiple accounts at a time.

In a transaction joint accounts are called as single person where there is only one main account in consideration and no secondary account exists for the same.

As in the given options,

Option A of husband and wife investing in a joint account means a single account is made of which both the husband and wife are controllers.

Option B is of UTMA account which is made for the benefit of the minor child, although involves two people that is parent and child, but is run individually by the parent and is a single account.

Further Option C provides for separate investment accounts , which means two different accounts and therefore are completely different one of father and another of son, thus do not qualify of quantity discount jointly, either of the one account can claim the quantity discount as a person.

4 0
3 years ago
Suppose the Federal Reserve sets the reserve requirement at 12 percent, banks hold no excess reserves, and no additional currenc
Naily [24]

Answer:

See below.

Explanation:

For a)

The money multiplier or the credit multiplier can be calculated as follows,

Money multiplier = 1 / reserve ratio

Multiplier = 1 / 0.12 = 8.33 times

For b)

For a negative $80 million change by the Fed there will be a total change in the economy of 80 * 8.33 = $666.4 million.

A -80 million change will contract money supply by $666.4 million in the economy.

For c)

This can be calculated by dividing the target by the money multiplier.

So to achieve a change of $500m the Fed will expand the money supply by

= 500 / 8.33 = $60.02m.

Hope that helps.

8 0
3 years ago
Other questions:
  • Perfect Stampers makes and sells aftermarket hub caps. The variable cost for each hub cap is $4.75, and the hub cap sells for $9
    15·2 answers
  • A company's normal selling price for its product is $20 per unit. however, due to market competition, the selling price has fall
    14·1 answer
  • 2. Selected data from the Carmen Company at year end are presented below: Total assets $2,000,000 Average total assets 2,200,000
    6·1 answer
  • Bubble Inc., a chewing gum manufacturer, specifically targets children in its advertisements. In its latest advertisement, the c
    10·1 answer
  • The type of decision making a consumer uses for a product does not necessarily remain constant.why?​
    7·1 answer
  • Fashion, Inc. had a Retained Earnings balance of $16,000 at December 31, 2021. The company had an average income of $6,500 over
    5·1 answer
  • Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $5
    15·1 answer
  • A company incurs total costs of $8,000 to process Product A. The company can then sell Product A as is for total daily revenue o
    10·1 answer
  • Loan 1:
    10·1 answer
  • 5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses
    7·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!