Company due to expected bankruptcy costs

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Reference no: EM131871370

1. Reese, Inc., has debt outstanding with a face value of $7 million. The value of the firm if it were entirely financed by equity would be $19.75 million. The company also has 350,000 shares of stock outstanding that sell at a price of $40 per share. The corporate tax rate is 35 percent. What is the decrease in the value of the company due to expected bankruptcy costs?

A. $650,000

B. $1,200,000

C. $19,750,000

D. 750,000

E. Impossible to calculate with information given.

2. Henry is trying to determine Franco Inc’s cost of debt. The firm has a debt issue outstanding with 17 years to maturity that is quoted at 90 percent of face value. The issue makes semiannual payments and has a coupon rate of 6 percent annually. What is Franco Inc’s pretax cost of debt? If the tax rate is 35 percent, what is the aftertax cost of debt?

A. Pre Tax: 8.39%, After Tax: 6.75%

B. Pre Tax: 7.02%, After Tax: 4.56%

C. Pre Tax: 11.55%, After Tax: 7.51%

D. Pre Tax: 9.65%, After Tax: 8.22%

E. Impossible to calculate with information given.

Provide excel calculation.

Reference no: EM131871370

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