Can anyone please help before I throw my calculator against the wall? I understand how to do the below problem, but using their method to calculate the interest rate, i keep getting -2.08%. When i manually plug in 6 percent (as shown) and compute the FV, I get $1,000! I can’t figure out wtf I’m doing wrong. I’m not in BEG mode and I’ve cleared the thing multiple times.
A company has a target capital structure of 40% debt and 60% equity. The company is a constant growth firm that just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8%.
- The company’s bonds pay 10% coupon (semi-annual payout), mature in 20 years, and sell for $849.54.
- The company’s stock beta is 1.2.
- The company’s marginal tax rate is 40%.
- The risk-free rate is 10%.
- The market risk premium is 5%.
The company’s after-tax cost of debt is:
A)
4.8%.
B)
12.0%. C) 7.2%.
Before-tax cost of debt capital: N = 40; PMT = 50; FV = 1,000; PV = 849.54; CPT I/Y = 6% × 2 = 12%
After-tax cost of debt capital = (12)(1 − 0.4) = 7.2%.