Corporate Finance - Corporate Finance Section 2
- Option : B
- Explanation : Statement B is not an assumption we make when using the company’s marginal cost of capital to calculate the NPV of a project.
- Option : B
- Explanation : Bond yield plus risk premium is used to calculate cost of equity not cost of debt. The other two are approaches to calculate cost of debt.
28. If the debt rating approach is used to determine the cost of debt, then:
- Option : B
- Explanation : The debt rating approach depends on knowledge of the company’s rating and can be compared with yields on bonds in the public market.
- Option : B
- Explanation : Using the financial calculator, determine the yield. N = 10, PV = -980, PMT = 80/2 = 40, FV = 1000, CPT I/Y = 4.25 semiannual Annual yield = 4.25 * 2 = 8.50 before tax After-tax cost of debt: 8.50% (1 – 35%) = 5.525 ~ 5.53%.
- Option : A
- Explanation : The appropriate cost is the marginal cost of debt. The before-tax cost of debt can be calculated by the yield to maturity on a comparable outstanding. After adjusting for tax, the after-tax cost of debt is 8(1 – 0.35) = 8(0.65) = 5.2%.
