Question

3. The Dayton Corporation is considering a new investment, which would be financed from debt. Dayton...

3. The Dayton Corporation is considering a new investment, which would be financed from debt. Dayton could sell new $1k par value bonds at a new price of $950. The bonds would mature in 15 years, and the coupon interest rate is 10%. Compute the after-tax cost of capital to Dayton for bonds, assuming a 34% tax rate. Show work.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

After-tax cost of debt = Yield to maturity on the bond x (1 – Tax Rate)

Yield to Maturity (YTM) of the Bond

The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)

Variables

Financial Calculator Keys

Figure

Face Value [$1,000]

FV

1,000

Coupon Amount [$1,000 x10%]

PMT

100

Yield to Maturity [YTM]

1/Y

?

Time to Maturity [15 Years ]

N

15

Bond Price [950]

PV

-950

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the yield to maturity (YTM) on the bond = 10.68%

So after tax cost of debt = 10.68*(1-.34) = 7.05%

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
​(Computing the cost of​ debt) The Shiloh Corporation is contemplating a new investment that it plans...
​(Computing the cost of​ debt) The Shiloh Corporation is contemplating a new investment that it plans to finance using​ one-third debt. The firm can sell new ​$1,000 par value bonds with a 15​-year maturity and a coupon interest rate of 12.1 percent​ (with interest paid​ semiannually) at a price of ​$951 If the company is in a 34 percent tax​bracket, what is the​ after-tax cost of capital for the​ bonds? The​ after-tax cost of debt is nothing​%. ​(Round to two...
(Individual or component costs of capital) Your firm is considering a new investment proposal and would...
(Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following: A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.9 percent that is paid semiannually: the bond is currently setting for a price of $1,129 and will mature in 10 years....
Your firm is considering a new investment proposal and would like to calculate its weighted average...
Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in​ this, compute the cost of capital for the firm for the​ following: 1. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.2% that is paid semiannually. The bond is currently selling for a price of $1127 and will mature in 10 years. The firm;s tax rate is 34%....
Kuhn Corporation is considering a new project that will require an initial investment of $20,000,000. It...
Kuhn Corporation is considering a new project that will require an initial investment of $20,000,000. It has a target capital structure consisting of 35% debt, 2% preferred stock, and 63% common equity. Kuhn has noncallable bonds outstanding that mature in 15 years with a face value of $1,000, an annual coupon rate of 11%, and a market price of $1,555.38. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it...
Consider the case of Kuhn Corporation. Kuhn Corporation is considering a new project that will require...
Consider the case of Kuhn Corporation. Kuhn Corporation is considering a new project that will require an initial investment of $45,000,000. It has a target capital structure consisting of 35% debt, 2% preferred stock, and 63% common equity. Kuhn has noncallable bonds outstanding that mature in 15 years with a face value of $1,000, an annual coupon rate of 11%, and a market price of $1,555.38. The yield on the company’s current bonds is a good approximation of the yield...
You work for an investment banking firm and have been asked by management of Vestor Corporation...
You work for an investment banking firm and have been asked by management of Vestor Corporation (not real), a software development company, to calculate its weighted average cost of capital, to use in evaluating a new company investment. The firm is considering a new investment in a warehousing facility, which it believes will generate an internal rate of return of 11.5%. The market value of Vestor's capital structure is as follows: Source of Capital Market Value Bonds $10,000,000 Preferred Stock...
A total investment of $ 34,000,000.00 USD for new equipment The equipment had fixed maintenance contracts...
A total investment of $ 34,000,000.00 USD for new equipment The equipment had fixed maintenance contracts of $ 4,400,000.00 per year salvage value of $ 7,000,000.00 variable costs were 53 % of revenues. Increase in working capital of $ 6,000,000.00 and $ 1,200,000.00 of this increase would be offset with accounts payable The corporate tax rate was 34 % currently has 1,000,000 shares of stock outstanding at a current price of $ 16.00 also has 30,000 bonds outstanding, with a...
• Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new...
• Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 10% semi-annual coupon bonds. The market price of the bonds is $1,090 each. Crandal's flotation expense on the new bonds will be $40 per bond. Crandal's marginal tax rate is 25%. What is the After-Tax cost of debt for the newly-issued bonds? A) 6.68% B) 7.03% C) 7.21% D) 7.54% B is the correct answer, please show how you arrive at...
Caspian Sea Drinks' is financed with 61.00% equity and the remainder in debt. They have 11.00-year,...
Caspian Sea Drinks' is financed with 61.00% equity and the remainder in debt. They have 11.00-year, semi-annual pay, 5.40% coupon bonds which sell for 97.00% of par. Their stock currently has a market value of $25.46 and Mr. Bensen believes the market estimates that dividends will grow at 3.51% forever. Next year’s dividend is projected to be $2.95. Assuming a marginal tax rate of 28.00%, what is their WACC (weighted average cost of capital)?
Caspian Sea Drinks' is financed with 69.00% equity and the remainder in debt. They have 11.00-year,...
Caspian Sea Drinks' is financed with 69.00% equity and the remainder in debt. They have 11.00-year, semi-annual pay, 5.17% coupon bonds which sell for 98.38% of par. Their stock currently has a market value of $25.00 and Mr. Bensen believes the market estimates that dividends will grow at 3.90% forever. Next year’s dividend is projected to be $2.01. Assuming a marginal tax rate of 22.00%, what is their WACC (weighted average cost of capital)?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT