What is the pre-tax cost of debt for the newly-issued bonds

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Reference no: EM131896910

You are required to show the following 3 steps for each problem (sample questions and solutions are provided for guidance):

(i) Describe and interpret the assumptions related to the problem.

(ii) Apply the appropriate mathematical model to solve the problem.

(iii) Calculate the correct solution to the problem.

1. ABC Corp. is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Flotation expense on the new bonds will be $50 per bond. The marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds?

2. GHJ Inc. is investing in a new project of $16 million. It will raise $2 million of bonds, $4 million of preferred stock, and $10 million of new common stock. If the after-tax cost of debt is 7%, cost of preferred stock is 9%, the cost of retained earnings is 14%, and the cost of new common stock is 17%, what is the WACC?

Reference no: EM131896910

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