Matoika Mfg.has a 38% tax rate. They issued a 25-year, 12% semiannual bond 3 years ago. The

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Question:

Matoika Mfg.has a 38% tax rate. They issued a 25-year, 12% semiannual bond 3 years ago. The bond currently sells for 94%. The book value of the debt issue is $40 million. There is a second debt issue on the market, a zero coupon bond with 14 years left to maturity; the book value of this issue is $45 million and the bonds sell for 53% of par.

What is the total book value of the debt? $85,000,000

What is the company's total market value of debt? $61,450,000

What is your best estimate of their after-tax cost of debt?

Question 2:

A company has a target debt-equity ratio of 0.83. Its WACC is 9.6%, and the tax rate is 35%.

a. If the company's cost of equity is 14%, what is its pre-tax cost of debt?

b. If instead you know that the after-tax cost of debt is 6.8%, what is the cost of equity?

Question 3:

Assume a company has 8.9 million shares of common stock outstanding, 330,000 shares of 5% $100 par value preferred stock outstanding, and 151,000 7.50% semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $37 per share and has a beta of 1.45, the preferred stock currently sells for $93 per share, and the bonds have 15 years to maturity and sell for 118% of par. The market risk premium is 7.7%, T-bills are yielding 4%, and the company's tax rate is 40%.

What is the firm's market value capital structure? Debt $178,180,000 Equity $329,300,000 Pref Stk $30,690,000

What discount rate should the firm use to discount a proposed investment's cash flows?

Question 4:

A company with a valuation of $520,000 can borrow at 4%. It has no debt, and it's cost of equity is 10%.

If the applicable corporate tax rate is 35%, what is EBIT for the company?

What will the value be if the company borrows $122,000 and uses the proceeds to repurchase shares?

Question 5:

Assume a company uses a residual dividend policy. A debt-equity ratio of 2.0 is considered optimal. Earnings for the period just ended were $3,400, and a dividend of $820 was declared.

How much in new debt was borrowed? $5,160 What were the total capital outlays?