What is the firm''s after-tax cost of debt

Assignment Help Finance Basics
Reference no: EM13686138

1. Rubberman Corporation, a manufacturer of consumer plastic products, is evaluating its capital structure. The balance sheet of the company is as follows (in millions):
Assets Liabilities
Fixed Assets $4000 Debt $2,500
Current Assets $1000 Equity $2,500
In addition, you are provided the following information:

(a) The debt is in the form of long term bonds, with a coupon rate of 10%. The bonds are currently rated AA and are selling at a yield of 12% (the market value of the bonds is 80% of the face value).

(b) The firm currently has 50 million shares outstanding, and the current market price is $80 per share. The firm pays a dividend of $4 per share and has a price/earnings ratio of 10.

(c) The stock currently has a beta of 1.2. The six-month Treasury bill rate is 8%.

(d) The tax rate for this firm is 40%.

I. What is the debt/equity ratio for this firm in book value terms? in market value terms?

II. What is the debt/(debt+equity) ratio for this firm in book value terms? in market value terms?

III. What is the firm's after-tax cost of debt?

IV. What is the firm's cost of equity?

V. What is the firm's current cost of capital?

Please show all work in excel and highligh answer

Reference no: EM13686138

Questions Cloud

Outstanding bonds : Rockne, Inc., has outstanding bonds that will mature in six years and pay an 8 percent coupon semiannually. If you paid $1,001.73 today and your required rate of return was 7.30 percent.
What is the next-lowest positive frequency : What is the lowest positive frequency at which the CTFT could be non-zero and what is the next-lowest positive frequency at which the CTFT could be non-zero?
What is the market value of the bond : Knight, Inc., has issued a three-year bond that pays a coupon of 5.50 percent. Coupon payments are made semiannually. Given the market rate of interest of 4.10 percent, what is the market value of the bond?
The current market price of the firm bonds : The current market price of the firm's bonds?
What is the firm''s after-tax cost of debt : What is the firm's after-tax cost of debt?
What happens to the production possibilities frontier : Where would you plot unemployment on a production possibilities frontier? Where would you plot full employment on a production possibilities frontier? Now presume that is a time of crisis everyone pitches in and works much harder than usual. What hap..
A consumers reservation price is the price : A consumer's reservation price is the price at which a:
Spends more on rent-seeking activities than customers : Which of the following explains why big business typically spends more on rent-seeking activities than customers?
A companyy is planning an acquisition : A companyy is planning an acquisition.

Reviews

Write a Review

Finance Basics Questions & Answers

  What is the corresponding capitalization rate

What is the corresponding capitalization rate?

  Prepare the journal entry that wood-mode should make

Prepare the journal entry that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time of sale the $413,000 payment.

  What will these bonds sell for at issuance

Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year? c. Repeat part (b) using the straight-line method for the interest deduction.

  Rights issues

Assuming you hold 7000 shares in Argosy Property Ltd, evaluate your wealth position if you opt for each of the actions suggested above

  What would be your rate of return

what would have been your rate of return on this investment? What would be your rate of return if you had put in a market order? What if your limit order was at $18?

  Computation of expected future return of the debt

ABC Corporation will earn $60 if it does well. The debtholders are promised payments of $35 if the firm does well. If corporation does poorly, expected earnings will be $30 and the repayment will be $20 because of dead weight cost of bankruptcy.

  How much responsibility should a corporate officer have

Is it ever appropriate in the business world to hold a superior liable for a subordinate's criminal action (as may often be the case in a military structure), or should we each just be responsible for our own actions?

  Description of annuity problem

Which of the following cash flows is equal to receiving $125.00 today supposing a 9% annual discount rate?

  What is the delta with respect to the index

The risk-free rate is 5% and the dividend yield on an index is 2%. What is the delta with respect to the index of a one-year futures on the index?

  Discuss the implications of the deviations from the

discuss the implications of the deviations from the purchasing power parity for countries competitive positions in the

  Set up an amortization schedule

Set up an amortization schedule for a $25,000 loan to be repaid in equal installments at the end of each of the next 5 years. The interest rate is 10%, compounded annually, and the annual payment is $ 6,594.94.

  What is the profitability index for the project

If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd