Question

Railsplitters, Inc. has the following information for its capital structure: Instrument: Amount Issued Current Price YIM Bond A $500 Million 100.82 4.36% Bond B $350 Million 101.36 4.49% Common Stock 42.5 Million Shares $28.21 per share E(R) Market = 8.65% B = 1.27 Expected Dividend = $1.95 Rf = 2.10% Growth Rate = 2.75% Given this information, if the tax rate of the firm is 30%, what is the after-tax cost of debt? 4.41% 04.1296 3.76% 3.09%

Answer 1

Before tax cost of debt= (500/850)*4.36%+(350/850)*4.49%=4.41%

After tax cost of debt= Yield*(1-tax rate)=4.41%(1-30%)=3.09%

Option 4 is correct.