Question

8. Happy Tree Company just issued $100,000,000 of 10-year bonds with a coupon rate of 3%. The bonds were purchased at face value (par value). The company paid 2% flotation costs. The marginal tax rate for Happy Tree Company is 25%. What is the after-tax cost of the debt to the Company? 1.5% a. b.1.7% c. 2.09% d. 2.25% 2.3% e. 9. The Internet Express Company has 1.4 million shares of stock outstanding. The stock currently sells for $20/share. The firm's debt is publicly traded and was recently quoted at 93% of face value. The debt has a total face value of $5 million, and it is currently priced to yield 10%. The risk-free rate is 8% and the market risk premium is 7%. You've learned that Internet Express has a beta of 1.24. If the corporate tax rate is 34%, what is the company's WACC? a.12.9% b. 12.2% 12.3% d. 15.2% e. 12.0% C.

Answer 1

Question 8:

First we calculate the before tax cost of debt using the YTM where nper =10, pmt = 3% *100 = 3, fv =100 and pv =100 + 2%*100 (flotation cost) = 102

YTM =rate(nper,pmt,pv,fv) in excel =rate(10,3,-102,100) = 2.78%

After tax cost of debt = pretax cost of debt *(1-tax rate) = 2.78%*(1-0.25) = 2.09%

After tax cost of debt = 2.09% (Option c)

Question 9

Total equity = 1.4*20 = 28 million

Total debt = 5 million

Total = 33 million

After tax cost of debt = 10%*(1-0.34) = 6.6%

Cost of equity = risk free rate + beta* market risk premium = 8+1.24*7 = 16.68%

WACC = 5/33*6.6 +28/33*16.68 = 15.15% = 15.2%

Answer = 15.2% (Option d)