Purchase Solution

Calculating a Corporation's Cost of Debt

Not what you're looking for?

Ask Custom Question

Calculate the cost of debt:

Shanken Corp issued a 30 year, 7 percent semiannual bond 7 years go. The bond currently sells for 108% for its face value.

The company's tax rate is 35%.
What is the pretax cost of debt?
What is the after-tax cost of debt?
Which is more relevant the pretax or the after-tax cost of debt? Why?

Show your work.

Purchase this Solution
Solution Summary

This solution explains how to calculate an organization's pretax cost of debt, after-tax cost of debt, and addresses which of these costs of debt is more relevant.

Solution Preview

See attached file.

What is the pretax cost of debt?

The pretax cost of debt is the yield to maturity (YTM) on the debt since YTM represents the current required return of the ...

Purchase this Solution
Free BrainMass Quizzes
Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Motivation

This tests some key elements of major motivation theories.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

View More Free Quizzes
Related BrainMass Solutions

  • What is the net cost of the call premium.

    435708 What is the net cost of the call premium. X Corp is refunding 12 million worth of 10%debt. The corporation's tax rate is 35%. The call premium is 9%. What is the net cost of the call premium?

  • WACC, CAPM, Holding period returns

    Libby Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 15 percent, and the cost of debt is 8 percent. The relevant tax rate is 35%. What is Libby's WACC?

  • Buchanan Corp. is refunding $12 million worth of 10% debt. T

    452683 Buchanan Corp. is refunding $12 million worth of 10% debt. The corporation's tax rate is 35%. The call premium is 9%. What is the net cost of the call premium? Buchanan Corp. is refunding $12 million worth of 10% debt.

  • Winston Corp: Calculating Net Income

    Compute the net income reported by Winston for each of the three years, assuming it accounts for investment in Fullbright using (a) the cost method; (b) the equity method The Cost Method 20X2 Winston Corporation's Operating Income $100,000 Winston

  • Inflation premium

    yield on Crockett Corporation's 5-year bonds Crockett Corporation's 5-year bonds: r = r* + IP + DRP + LP + MRP where r = required return on a debt security r* = real risk-free rate of interest

  • Dublin International Corporation's marginal tax rate is 40%.

    448988 Dublin International Corporation's Marginal Tax Rate Dublin International Corporation's marginal tax rate is 40%. It can issue 3-year bonds with a coupon rate of 8.5% and par value of $1,000.

  • WACC

    New Debt Proporiton = 300,000/(640,000) = 0.47 New Equity Proportion = (640,000-300,000)/640,000=0.53 WACC = Proportion of Debt * Cost of Debt *(1-Tax Rate) + Proportion of Equity * Cost of Equity = 0.47 * 8% * (1-.34) + .53 * 12%

  • Multiple Choice Questions in Finance

    If a firm finds that the cost of debt financing is currently less than the cost of equity financing, an increase in its debt ratio will always reduce its cost of capital. e. Statements a and b are correct. 9.

  • Credit ratings on cost of capital of First Tennessee Utility

    Therefore, the cost of debt is 9.11%. b) Cost of preferred stock, Kp. Cost of preferred stock = Dividend/Net issuing price = (9% x $100)/($100 - $1.5) = $9/$98.5.

View More Related Solutions