Question

1. What is the difference between valuing a debt security and valuing the equity of a company? Explain

2. if an interest rate on a company's debt is 6% and that their tax rate is 35%.what would the cost of debt capital be? please show me the calculation

3.or if a company's market beta equals 0.8, the risk-free rate is 5%, and the market return equals 8%. how do you find the company's cost of equity capital. id like to see these calculations aswell, thanks so much in advance

Answer 1

1. Value of Debt uses coupon payment , yield till maturity and maturity of the bond or debt security.
Price of Bond = PV of Coupons + PV of Par Value (Where discounting is done at YTM)
This helps in calculating market value of debt

Value of equity can be calculated using Dividend discount model . Price of stock depends on cost of equity , growth and dividends
Value of stock price = Dividend Next year/(Cost of Equity - Growth)
This helps in calculating market value of equity

2. After tax cost of Debt = Cost of Debt*(1-Tax Rate ) = 6%*(1-35%) = 3.90%

3. Company's Cost of Capital = Risk free Rate +Beta*(Market Return - Risk free rate) = 5% + 0.8*(8%-5%) = 7.40%