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.
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- 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.
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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.
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- 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%.
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- 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%.
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