What is best estimate of the after-tax cost of debt

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Reference no: EM131350731

Assume that you have been hired as a consultant by company X, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. The stok is currenty selling for $15,25 per share, and its noncallable $1.000 par value, 20-years, 7,25% bonds with semiannual payments are selling for $925.00. There are 40.000 bonds, $1.000 par value and 10.000.000 shares of common stock.

The company's balance sheet shows no other debt and no preferred stock. The beta is 1.15 and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50% and the firm's tax rate is 40%

What is the best estimate of the after-tax cost of debt?

a. 4.65%

b. 4.81%

c. 4.97%

d. 5.14%

Reference no: EM131350731

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