Question

Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 12.50% for a period of four years. Its marginal federal-plus-state tax rate is 45%. WGC's after-tax cost of debt is (rounded to two decimal places). At the present time, Western Gas & Electric Company (WGC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,555.38 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If WGC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? O 3.61% O 3.46% O 2.41% O 3.01%

Answer 1

Answers O after tax cost ds debt = 12.50 64. X. (1-454.) = 0.125 x:(1-0.45) = 0.125 x 0.55 = 6.87.1. I . after fex cost de debt = 6-874. @ before tax cost do debut using exull function as a RATE (nper, pmt, pu, fu) RATE (i5, 1000 x 11%. ; -1555.38,1000 = 5.4841 afiter tax cost of debt - 5.484. *(1-4.5.).) = 3.01%. .:option D' is correct answer

* using Constant growth model, stock price (o-f) = D/6-9) 2235(1-0.05) = 1,36) Go -0.05a). 8 = .611 @ Addition to retained farming = $ 857,000 weight of Equity = 60% Retained Earning, breakeren - - 857,000 Gol. = 1,428,333 Retained Eamings break even = $1,428, 333. .. option it is correct Answer, OM