chap 13 problem set

chap 13 problem set - The Dybvig Corporations common stock...

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The Dybvig Corporation’s common stock has a beta of 1.20.

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Required: If the risk-free rate is 3.50 percent and the expected return on the market is 11 percent, what is Dybvig’s cost of equity capital? (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16)) Cost of equity capital % Explanation: With the information given, we can find the cost of equity using the CAPM. The cost of equity is: R E = 0.035 + 1.20(0.11 – 0.035) = 0.1250 or 12.50% Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 11 years to maturity that is quoted at 97 percent of face value. The issue makes semiannual payments and has a coupon rate of 9 percent annually. Required: (a) What is Advance’s pretax cost of debt? (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16)) Pretax cost of debt % (b) If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16)) Aftertax cost of debt % Explanation: (a)
The pretax cost of debt is the YTM of the company’s bonds, so: P 0 = \$970 = \$45(PVIFA R%,22 ) + \$1,000(PVIF R%,22 ) R = 4.722% YTM = 2 × 4.722% = 9.44% (b) And the aftertax cost of debt is: R D = 0.0944 (1 – 0.35) = 0.0614 or 6.14% Shanken Corp. issued a 30-year, 10 percent semiannual bond 3 years ago. The bond currently sells for 109 percent of its face value. The company’s tax rate is 34 percent. The book value of the debt issue is \$22 million. In addition, the company has a second debt issue on the market, a zero coupon bond with three years left to maturity; the book value of this issue is \$80 million and the bonds sell for 76 percent of par. Required: (a) What is the company’s total book value of debt? (Do not include the dollar sign (\$). Round your answer to the nearest whole number. (e.g., 1,234,567)) Total book value of debt \$ (b) Calculate the total market value. (Do not include the dollar sign (\$). Round your answer to the nearest whole number. (e.g., 1,234,567)) Total market value \$

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(c) What is your best estimate of the aftertax cost of debt? (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16)) Aftertax cost of debt % Explanation: (a) The book value of debt is the total par value of all outstanding debt, so: BV D = \$22,000,000 + 80,000,000 = \$102,000,000 (b) To find the market value of debt, we find the price of the bonds and multiply by the number of bonds. Alternatively, we can multiply the price quote of the bond times the par value of the bonds. Doing so, we find: MV D = 1.09(\$22,000,000) + 0.76(\$80,000,000) = \$84,780,000 (c) The YTM of the company's coupon bonds is:
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chap 13 problem set - The Dybvig Corporations common stock...

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