Sunday, November 10, 2019

Douglass & Frank has a debt-equity ratio of 0.35. The pre-tax cost of debt is 8.2 percent while the unlevered cost of capital is 13.3 percent

Douglass & Frank has a debt-equity ratio of 0.35. The pre-tax cost of debt is 8.2 percent while the unlevered cost of capital is 13.3 percent. What is the cost of equity if the tax rate is 39 percent? 
 
A. 
13.79 percent

B. 
14.39 percent

C. 
14.86 percent

D. 
18.40 percent

E. 
18.87 percent
RE = 0.133 + (0.133 - 0.082) × 0.35 × (1 - 0.39) = 14.39 percent


78.
The June Bug has a $270,000 bond issue outstanding. These bonds have a 7.5 percent coupon, pay interest semiannually, and have a current market price equal to 98.6 percent of face value. The tax rate is 39 percent. What is the amount of the annual interest tax shield? 
 
A. 
$3,948.75

B. 
$4,112.60

C. 
$5,311.22

D. 
$7,897.50

E. 
$8,225.20
Annual interest tax shield = $270,000 × 0.075 × 0.39 = $7,897.50

79.
Georga's Restaurants has 5,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 8.25 percent. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 37 percent? 
 
A. 
$152,625.00

B. 
$162,411.90

C. 
$187,750.00

D. 
$210,420.00

E. 
$233,887.50
Annual interest tax shield = 5,000 × $1,000 × 0.0825 × 0.37 = $152,625.00

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