1.Ferryville Radar Technologies has five-year, 7.5 percent notes outstanding that trade at a yield to maturity of 6.8 percent. The company’s marginal tax rate is 35 percent. Ferryville plans to issue new five-year notes to finance an expansion. Ferryville’s cost of debt capital is closest to:

A)   2.4%.

B)   4.4%.

C)   2.6%.

D)   4.9%.

2.The 6 percent semiannual coupon, 7-year notes of Woodbine Transportation, Inc. trade for a price of $94.54. What is the company’s after-tax cost of debt capital if its marginal tax rate is 30 percent?

A)   2.1%.

B)   4.2%.

C)   4.9%.

D)   6.0%.

3.The debt of Savanna Equipment, Inc. has an average maturity of ten years and a BBB rating. A market yield to maturity is not available because the debt is not publicly traded, but the market yield on debt with similar characteristics is 8.33 percent. Savanna is planning to issue new ten-year notes that would be subordinate to the firm’s existing debt. The company’s marginal tax rate is 40 percent. The most appropriate estimate of the after-tax cost of this new debt is:

A)   Between 3.3% and 5.0%.

B)   Less than 3.3%.

C)   5.0%.

D)   More than 5.0%.

答案和详解如下：

1.Ferryville Radar Technologies has five-year, 7.5 percent notes outstanding that trade at a yield to maturity of 6.8 percent. The company’s marginal tax rate is 35 percent. Ferryville plans to issue new five-year notes to finance an expansion. Ferryville’s cost of debt capital is closest to:

A)   2.4%.

B)   4.4%.

C)   2.6%.

D)   4.9%.

The correct answer was B)

Ferryville’s cost of debt capital is kd(1 - t) = 6.8% × (1 - 0.35) = 4.42%. Note that the before-tax cost of debt is the yield to maturity on the company’s outstanding notes, not their coupon rate. If the expected yield on new par debt were known, we would use that. Since it is not, the yield to maturity on existing debt is the best approximation.

2.The 6 percent semiannual coupon, 7-year notes of Woodbine Transportation, Inc. trade for a price of $94.54. What is the company’s after-tax cost of debt capital if its marginal tax rate is 30 percent?

A)   2.1%.

B)   4.2%.

C)   4.9%.

D)   6.0%.

The correct answer was C)

To determine Woodbine’s before-tax cost of debt, find the yield to maturity on its outstanding notes:
PV = -94.54; FV = 100; PMT = 6 / 2 = 3; N = 14; CPT → I/Y = 3.50 × 2 = 7%
Woodbine’s after-tax cost of debt is kd(1 - t) = 7%(1 - 0.3) = 4.9%.

3.The debt of Savanna Equipment, Inc. has an average maturity of ten years and a BBB rating. A market yield to maturity is not available because the debt is not publicly traded, but the market yield on debt with similar characteristics is 8.33 percent. Savanna is planning to issue new ten-year notes that would be subordinate to the firm’s existing debt. The company’s marginal tax rate is 40 percent. The most appropriate estimate of the after-tax cost of this new debt is:

A)   Between 3.3% and 5.0%.

B)   Less than 3.3%.

C)   5.0%.

D)   More than 5.0%.

The correct answer was D)

The after-tax cost of debt similar to Savanna’s existing debt is kd(1 - t) = 8.33%(1 - 0.4) = 5.0%. Because the anticipated new debt will be subordinated in the company’s debt structure, investors will demand a higher yield than the existing debt carries. Therefore, the appropriate after-tax cost of the new debt is more than 5.0%.