Question 1) Calculate the aftertax cost of debt under each of the following conditions.
Yield Corporate Tax Rate
a. 8.0% 18%
b. 12.0% 34%
c. 10.6% 15%
Question 2) Acme Corp has a $1,000 par value bond outstanding with 25 years to maturity. The bond carries an annual interest payment of $88 and is currently selling for $925. Addison is in a 25 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar.
a. Compute the approximate yield to maturity (Formula 11-1) on the old issue and use this as the yield for the new issue.
b. Make the appropriate tax adjustment to determine the aftertax cost of debt.
Question 3) Walgrens can sell preferred stock for $70 with an estimated flotation cost of $2.50. It is anticipated that the preferred stock will pay $6 per share in dividends.
a. Compute the cost of preferred stock for Walgrens.
b. Do we need to make a tax adjustment for the issuing firm?