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Company's cost of debt

A company has just been taken over by new management which believes that it can raise earnings before taxes (EBT) from $600 to $1,000, merely by cutting overtime pay and thus reducing the cost of goods sold. Prior to the change, the following data applied:

Total assets: $8,000 Debt ratio: 45%
Tax rate: 35% BEP ratio: 13.3125%
EBT: $600 Sales: $15,000

These data have been constant for several years, and all income is paid out as dividends. Sales, the tax rate, and the balance sheet will remain constant. What is the company's cost of debt? (Hint: Work only with old data.)

a. 12.92%
b. 13.23%
c. 13.51%
d. 13.75%
e. 14.00%

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Solution Preview

Answer: 12.92%

BEP ratio = EBIT/Total Assets
13.3125% = ...

Solution Summary

This solution is comprised of a detailed calculation to find company's cost of debt.