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After-tax cost of debt, yield to maturity

Problem # 11-3

Calculate the after-tax cost of debt under each of the following conditions.

Yield Corporate Tax Rate

a. ..... 8.0 % 18 %
b. ....12.0 % 34 %
c. ....10.6 % 15 %

Problem # 11-9

Mead Corporation is planning to issue debt that will mature in 2025. In many respects the issue is similar to currently outstanding debt of the corporation. Using table 11-2 on page 315 of the chapter,

a. Identify the yield to maturity on similarity outstanding debt for the firm, in terms of maturity.
b. Assume that because the new debt will be issued at par, the required yield to maturity will be 0.15 % higher than the value determined in part a. Add this factor to the answer in a. (New issues at par sometimes require a slightly higher yield than old issues that are trading below par. There is less leverage and fewer tax advantages.)
c. If the firm is in a 30 % tax bracket, what is the after-tax cost of debt?

Problem # 11-13

Murray Motor Company wants you to calculate the common cost of stock. During the next 12 months, the company expects to pay dividends (D1) of $2.50 per share, and the current price of its common stock is $ 50 per share. The expected growth rate is 8 %.

a. Compute the cost of retained earnings (Ke). Use Formula 11-6 on page 319.
b. If a $ 3 flotation cost is involved, compute the cost of new common stock (Kn). Use Formula 11-7 on page 320.

Problem # 11-16

Global Technology's capital structure is as follows:

Debt .......................... 35 %
Preferred stock ............. 15 %
Common equity ........... 50 %

After-tax cost of debt is 6.5 %: the cost of preferred stock is 10 %; and the cost of common equity (in the form of retained earnings ) is 13.5 %. Calculate Global Technology's weighted average cost of capital in a manner similar to Table 11-1 on page 31.3.l

Solution Preview

Problem # 11-3
After-tax cost of debt = Yield*(1-Tax rate)
a. =8.0%*(1-18%)= 6.56%
b. =12.0%*(1-34%)= 7.92%
c. =10.6%*(1-15%)= 9.01%

Problem # 11-9

Mead Corporation is planning to issue debt that will mature in 2025. In many respects the ...

Solution Summary

After-tax cost of debt, yield to maturity, cost of retained earnings were examined in multiple situations.

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