Explore BrainMass

Explore BrainMass

    Interest Rates and the Cost of Debt

    The cost of debt is the rate of return that investors in a firm's debt expect when purchasing the firm's debt securities. In principle, the beta for the firm's debt could be determined, and we could use the security market line to determine the required return on the firm's debt. In practice, we assume that the beta of a firm's debt is close enough to zero to assume it is, in fact, zero. 

    The cost of debt is usually easy to determine by looking at the yield to maturity of a firm's outstanding bonds. Similary, if the firm's credit rating was an A, we could look at market rates for bonds with the same credit rating. The interest rate the firm pays is usually broken into two components: the risk free rate, and a default risk premium. This is because corporate bonds, unlike US Treasury Bills (for example), have a risk of default. 


    Where
    r    B = the rate of return on debt
    rrisk-free = the risk-free rate of return

    The coupon rate on the firm's outstanding debt usually reflects the firm's cost of debt when these securities were issued. The coupon rate should not be used to determine the firm's current cost of debt. To find today's cost of debt, we can look at the price of bonds currently in the market, and the corresponding expected yield to maturities. 

    Photo by Karim MANJRA on Unsplash

    © BrainMass Inc. brainmass.com December 1, 2023, 5:29 pm ad1c9bdddf

    BrainMass Solutions Available for Instant Download

    Credit Card Calculations in Excel

    Assume you have a balance of $1000 on a credit card with an APR of 12%, or 1% per month. You start making monthly payments of $200, but at the same time you charge an additional $100 per month to the credit card. Assume that interest for a given month is based on the balance for the previous month. The following table shows how

    Business Financing Annual Rates

    7. Bank A offers loans with a 10% stated annual rate and a 10% compensating balance. You wish to obtain $250,000 in a six month loan. a. How much must you borrow to obtain $250,000 in usable funds? Assume you currently do not have any funds on deposit at the bank. What is the effective annual rate on a six month loan? b. Ho

    Exponential Modeling: Simple and Compound Interest

    1) Create an Excel spreadsheet comparing simple and interest compounded yearly for an investment of $18,000 over 18 years with an APR of 3.75%. a. Create a column in Excel listing the years 0-18. b. Determine the equation that would model simple interest. Hints: How much simple interest would the account earn each year? What

    Assessing Auto Loans

    Assessing Auto Loans 1. Search the internet and locate the sale price for the car of your dreams. 2. For the purpose of this exercise, you can ignore sales tax. 3. Determine the annual interest rate for your loan using information from a local bank or an internet ad. Reduce this rate by 2%. This is r, but expressed as a

    Ratio Analysis and Interpretation

    Question 5 (10) The following information is applicable to questions 5.1 to 5.4: Ladders Ltd had their financial year end on 31 July 2015. The manager of the business you work for has tasked you to do an analysis of Ladders Ltd as he wants to go into a supplier agreement with them and needs to be sure that they are profitable

    Implicit Interest Rate and Accounts Receivable Aging

    Please help with the following problems: page 251 7-29. Millbridge Hospital buys its supplies in bulk and has recently switched vendors. The first purchase Millbridge made was for 500 boxes of gauze at $3.46 a box. The purchase had payment terms of 2/15 N/30. Millbridge earns four percent on its idle cash. Should it take the d

    Earnings/cash flow effect upon purchase of asset

    1.You plan to deposit $800 in a bank account now and $600 at the end of the year. If the account earns 7% interest per year, what will be the balance in the account right after you make the second deposit? The balance in the account right after you make the second deposit will be $ 2. Nokela Industries purchases a $40.0 m

    Interest and the economy

    Please provide a short essay around 200 words with 1 reference for the following: Interest rates are nothing more than a fraction sometimes represented as a decimal or a percent. Interest rates impact all of us both professionally and personally. One area of great concern are interest rates and how they apply to credit card d

    Compounding Interest on a Monthly Basis

    You receive a credit card application from Ally Bank Savings offering an introductory rate of 0.6 percent per year, compounded monthly for the first six months, increasing thereafter to 16.3 percent compounded monthly. Assume you transfer the $5,300 balance from your existing credit card and make no subsequent payments. How

    WACC, NPV, IRR, Compenent of Cost of Capital

    Smelting Machine Probability Net Cash Flows per Year 0.2 $14,100.00 0.5 $16,000.00 0.2 $17,000.00 0.1 $20,000.00 Paving Machine Probability Net Cash Flows per Year 0.2 $2,000.00 0.5

    Capital Budgeting Techniques

    Company currently has sales of 1,400,000 per yr. It's considering an add'l new office machine, which will not result in any new sales but will save the company 105,500 before taxes per yr over its 5 yr useful life. The machine will cost 300,000 plus another 12,000 for installation. The new asset will be depreciated using a modif

    Estimating YTC and YTM

    Company considering bonds for sale that have a $1000 par value and will mature in 16 years. The coupon rate on the bonds is 5% paid annually and are currently selling for $987 each. The bonds are called protected for the next 4 years and after this period they are callable at 105. 1) What is the YTM on these bonds? 2) If the

    Calculating the maximum offer price

    Evaluate the stock that paid a dividend of $4.25 last year and is currently selling for $36 per share. If your company decides to buy the stock, the stock will be held for 5 years and then sold. The growth rate on the stock is a constant at 3% per year and your company's required return on the stock would be 11%. What's the maxi

    Accounting: Breaking Even

    1. Group your fixed and variable costs 2. Calculate your break-even point in monthly sales 3. Determine your monthly sales needed to have a contribution margin of $10,000 4. Determine your net income/profit when you have a contribution margin of $10,000 5. Determine your margin of safety based on your monthly sales over the

    Present and Future Values Sample Calculations

    Find the following values for a lump sum assuming semiannual compounding: a. The future value of $500 invested at 8% for one year. b. The future value of $500 invested at 8% for five years. c. The present value of $500 to be received in one year when the opportunity cost rate is 8%. d. The present value of $

    Agency problem and agency cost

    Briefly explain the term "agency costs" as it related to a corporation. How can agency problems be minimized when a company uses debt?

    Internal Rate of Return, Payback Period & NPV

    An investment of $83 generates after-tax cash flows of $50.00 in Year 1, $70.00 in Year 2, and $133.00 in Year 3. The required rate of return is 20 percent. The net present value is Mavis, Inc., is evaluating a project. The company uses a 13.8 percent discount rate for this project. Cost and cash flows are shown in the table.

    Deflation: Real Interest Rates

    1. What would happen to real short term interest rates if the economy is going through a global deflationary period? 2. Relative to Fama's Efficient Market Hypothesis, which of the following markets is the most efficient: equity, debt, or foreign exchange?

    Interest rates and equilibrium in loanable funds market

    7.(a) Within the loanable funds theory, graphically show the effect of an increase in the money supply, assumed to be determined solely by the Fed, on the supply and demand for loanable funds and the equilibrium rate of interest assuming a constant real rate of interest and expected inflation to be constant. (b) Illustrate an

    Dividend Chronology

    Dividend Chronology On Friday, December 8, Hometown Power Co.'s board of directors declares a dividend of 75 cents per share payable on Wednesday, January 17, to shareholders of record as of Wednesday, January 3. When is the ex-dividend date? If a shareholder buys stock before that date, who gets the dividends on those shares—

    Bond Investment Discount Amorization Schedule

    Bond Investment Discount Amortization Schedule Tudor Company acquired $500,000 of Carr Corporation bonds for $487,706.69 on January 1, 2013. The bonds carry an 11% stated interest rate, pay interest semiannually on January 1 and July 1, were issued to yield 12%, and are due January 1, 2016. 1. Prepare two investment intere

    Calculating Cash Coverage Ratio

    Deluctable Turnips Inc. net income for the most recent year was 7,638. The tax rate was 34 percent. The firm paid 3,618 in total interest expense and deducted 4,873 in depreciation expense. What was the company's cash coverage ratio for the year?

    After-Tax Cost of Debt and Maturity

    The cost of debt: Beckham Corporation has semiannual bonds outstanding with 13 years to maturity and are currently priced at $746.16. If the bonds have a coupon rate of 8.5 percent, then what is the after-tax cost of debt for Beckham if its marginal tax rate is 35%? Assume that your calculation is made as on Wall Street.

    Interest Rates: Future Values

    1. a. What happens to the future value of an annuity if your increase the rate? b. What happens to the present value? 2. APR AND EAR: Should lending laws be changed to require lenders to report EARs in stead of APRs? Why or why not? 3. Time Value: On subsidized Stafford loans a common source of financial aid f

    GDP: Fiscal and Monetary Policy

    1. Suppose that the real GDP is below potential GDP. Answer the two questions below. a. What fiscal policy tools could be used to stimulate the economy? b. What monetary policy tools can the Federal Reserve use to stimulate the economy and increase economic growth. Please identify at least two specific tools. 2. What should