Problem:
Q1. How does the cost of a source of capital relate to the valuation concepts presented previously in Chapter 10 (Foundations of Financial Management. Published by McGraw-Hill/ Irwin, 11th ed.)?
Q2. Why do we use the overall cost of capital for investment decisions even when only one source of capital will be used?
Q3. In computing the cost of capital, do we use the historical costs of existing debt and equity or the current costs as determined in the market? Why?
Q4. Sullivan Cement Company can issue debt yielding 13 percent. The company is paying a 36 percent rate. What is the aftertax cost of debt?
Q5. Calculate the aftertax cost of debt under the following conditions:
Yield 8.0% Corporate Tax Rate 18%