1. Bedrick Co. has outstanding 20-year noncallable bonds with a face value of $1,000. These bonds have a current market price of $1,382.73 and an annual coupon rate of 13% and annual coupon payment. The company faces a tax rate of 35%. If the company wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt?
a. 5.75% b. 4.60% c. 5.18% d. 6.61%
2. Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate)
Sale price + (Sales price - Book value)*T
Sale price + (Sales price - Book value)*(1 - T)
Sale price + (Book value - Sale price)*T
Sale price + (Book value - Sale price)*(1 - T)
Sale price*(1 - T)