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# Interest Rates and the Cost of Debt

### Capitalizing interest

According to SFAS No. 34 interest on self-constructed assets should be capitalized. Present arguments in favor of capitalizing interest. Tie your arguments to the concepts and definitions found in the conceptual framework.

### Before and after tax cost of debt

Assume that Dell issued 30-year bonds, 8% coupon rate, semiannual, 7 years ago. The bond currently sells for 108% of face value. The company's tax rate is 35%. 1. What is the pretax cost of debt? 2. What is the after-tax cost of debt? 3. Which is more important and why?

### Interest Rate on Different Time of Maturity

Assume that interest rate parity (IRP) exists. Assume this information is provided by today's Wall Street Journal. Spot rate of Swiss franc = \$.80 6-month forward rate of Swiss franc = \$.78 12-month forward rate of Swiss franc = \$.81 Assume that the annualized U.S. interest rate is 7% for a six-month maturity and a 12-

### Weighted marginal cost of capital

Business XYZ is interested in measuring its overall cost of capital. Assuming that the business will retain the current capital structure in the future elaborated below, what is the weighted marginal cost of capital schedule? The business is within a 34% tax bracket. Debt: The business can raise an unlimited amount of debt b

### Effective annual interest rate

Your credit card agreement states that interest on any outstanding balance is computed monthly and at a rate of 1.25% on the outstanding balance. What is the effective annual interest rate on this credit card account?

### As a firm initially substitutes debt for equity financing, what happens to the cost of capital, and why?

3. A firm's current balance sheet is as follows: Assets \$100 Debt \$10 Equity \$90 Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital 0% 8% 12% ? 10 8 12 ? 20 8

### Financial Data: Finding an Estimate of the Risk-Free Rate of Interest

Find an estimate of the risk-free rate of interest (krf). To obtain this value, go to Bloomberg.com: Market Data and use the "U.S. 10-year Treasury" bond rate (middle column) as the risk-free rate. In addition, you also need a value for the market risk premium. Use an assumed market risk premium of 7.5%. Download the XYZ Stock I

### Tax research problem dealing with deductibility

After several years of a difficult marriage, Donald and Marla agreed to a divorce. As part of the property settlement, Marla transferred to Donald corporate stock, a commercial building, and a personal residence. Donald transferred other property to Marla, but the fair market value of the property was \$600,000 less than the fair

### Debt Redemption Funds

EEM, Inc has a \$100,000,000 debt outstanding that is due after 15 years. The contract required that after 5 years, the firm must set aside annually an amount so the debt is retired in full at maturity. If EEM can earn 8 percent on invested funds, how much must the company set aside each year.?

### Finance

SEE ATTACHMENT About AirJet Best Parts, Inc. AirJet Best Parts, Inc. is a company dedicated to the design and manufacturing of aviation and airplane technologies and parts. The company has commercial and military clients worldwide. Task 1: Assessing loan options for AirJet Best Parts, Inc. The company needs to finance

### Why two bonds with same interest rate not priced the same.

Two different companies of approximately similar financial strength and with similar management teams both have 30-year bonds that trade in active secondary markets. Company A is located in a country with relatively small increases in overall price levels; its bonds have a 4% return. Company B is located in a country with rela

### Money and Interest Rates

Money and Interest Rates Money and interest rates are important for individuals and businesses making decisions to finance purchases. The following articles deal with assessing conditions to finance purchases and important aspects of policy. Tom Woodruff has written an interesting and to-the-point article about effects of

### The capital structure decision and the cost of capital

Consider three companies: Borders, Clorox, and Amazon. Reflect on the nature of the business of these three companies. You are recommended to also get to the web site of one company in each of these categories. You might also check what the beta of each of these companies is. what would you recommend should the capital structu

### Cost of Borrowing: Calculate the After-Tax Cost of Debt

C1. (Cost of borrowing) A firm issues a 10-year debt obligation that bears a 12% coupon rate and gives the investor the right to put the bond back to the issuer at the end of the fifth year at 103% of its face amount. The issue has no sinking fund. Interest is paid semiannually. The issuer's tax rate is 34%. a. Calculate the

### Expectations Hypothesis: Wholesale Price of Heating Oil

Refer to a current issue of the Wall Street Journal. According to the expectations hypothesis, what is the best estimate for the wholesale price of heating oil next December?

7. Turner Co. estimates its uncollectible accounts expense to be 2 percent of credit sales. Turner's credit sales for 2006 were \$1,000,000. During 2006, Turner wrote off \$18,000 of uncollectible accounts. Turner's Allowance for Uncollectible Accounts account had a \$15,000 balance on January 1, 2006. On its December 31, 2006

### main characteristics of a fixed-rate loan

What are the main characteristics of a fixed-rate loan, an adjustable-rate loan, an interest-only loan and a reverse mortgage loan that are available to borrowers in mortgage lending? response is list of 4-6 attributes for each in bullet format

### 1. Define what is meant by interest rate risk. 2. Some financial advisors recommend you increase the amount of federal income taxes withheld from your paycheck each month so that you will get a larger refund come April 15th.

THE TIME VALUE OF MONEY #1 Some financial advisors recommend you increase the amount of federal income taxes withheld from your paycheck each month so that you will get a larger refund come April 15th. That is, you take home less today but get a bigger lump sum when you get your refund. Based on your knowledge of the time val

### Zero Coupon Bond Interest Rate

The Treasury department is offering to sell me a bond for \$613.81. I can not get any money from the bond for 10 years. What interest rate would I earn if i chose to buy the bond at the price they are offering.

### The Effective Annual Rate of Interest to Achieve the Goal

I have 35,000 in an investment account. I would like the account to grow to \$100,000 in 10 years, I don't want to make any payments to the account. What is the effective annual rate of interest that I need to achieve my goal.

### Permormace Measurement Calculations: Home Depot Inc.

The items below represent the ratios to be calculated for the past 3 years for HOME DEPOT in EXCEL. There needs to be a calculation for each year on each ratio. Formula needs to be included cannot just be a number in the cell. Asset Utilization Measurements ? Breakeven point ? Goodwill to Asset Ratio ? Interest Expens

### Value moves when interest rates change

Calculate the following Bond Values: Bond A: 5 year bond, CPN = 7.5%, par value = \$1000, Required Return = 12% Bond B: 5 year bond, CPN = 0%, par value = \$1000, Required Return = 5.75% Bond C: 10 year bond, CPN = 4.25%, par value = \$1000, Required Return = 7% Explain why and how the value of corporate bonds (par @ \$1,000

### Increasing debt - multiple choice question

Which of the following statements is likely to encourage a firm to increase the amount of debt in its capital structure? Its sales become less stable over time. Bankruptcy costs have increased. Management believes that the firmâ??s stock is overvalued. Its corporate tax rate increases.

### Amount of the installment payments and next year payment

1. If I bought a building for \$100,000, payable on the following terms: a \$10,000 down payment and 20 equal annual installment payments to include principal and interest of 10 percent per annum: What is the calculated amount of the installment payments and how much of the second years payments will go towards the interest pa

### nominal annual interest rate

1. Determine the value at the end of four years of a \$10,000 investment (today) in a bank certificate of deposit (CD) that pays a nominal annual interest rate of 12 percent, compounded. Do this for: semi-annual Quarterly Monthly 2. Explain how diversification can reduce the risk of a portfolio of assets to below the

### Interest on Bonds

Assume all bonds are \$1,000 par value. A person buys a 5 year, \$1,000 certificate of deposit that carries a nominal rate of 9%, compounded semiannually. 6 months after this purchase, a 4 1/2-year CD at the same bank offers a 9.5% annual rate, also compounded semiannually. How much difference is there in total interest paid by th

### Effective interest rate on the loan

1. Holland Construction Co. has an outstanding 180-day bank loan of \$400,000 at an annual interest rate of 9.5%. The company is required to maintain a 15% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount.

### Calculating different interest rates

(Cost 0f Bank Loan) For a one-year loan of \$100 with an APR interest rate of 15%, determine the cash flows and the APY for each of the following loans: Interest in arrears, Discount loan, Interest in arrears with a 10% compensating balance, Discount loan with a 10% compensating balance

### Calculating cost of debt

In an effort to raise money, a company sold a bond that now has 20 years of maturity. The bond has a 7% annual coupon which is paid quarterly and it now sells at a price of 1103.58. The bond has a par value of \$1000 and can't be called. If the companies tax rate is now 40%, what component of debt should be used in the WACC cal

### Refinancing inquiry

A person purchased a \$187,038 home ten years ago by paying 10% down and signing a 30-year mortgage at 11.1% compounded monthly. Interest rates have dropped and the owner wants to refinance the unpaid balance by signing a new 30-year mortgage at 6.6% compounded monthly. How much interest will refinancing save? Money saved: