Calculate the cost of debt for the following firm:
Borrowing Rate 9.5%
Historical Beta .97 -
Marginal Tax Rate 40%
Credit Rating BB+
Owner's Equity 15%
Quick Ratio 1.7 -
EPS $1.70 -
P/E ratio 12 -
Estimated Dividends $.30 -
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A. B. C. D. E. F.D
The cost of debt is simply the rate of borrowing less the tax savings. Due to the fact that interest expense is tax deductible, the cost of debt in this case is 9.5%(1 -
.4) = 9.5%(.6) = 5.7%.
To calculate the cost of debt for the given firm, we can use the following formula:
Cost of Debt = Borrowing Rate × (1 - Marginal Tax Rate)
Let's plug in the given values into the formula:
Borrowing Rate = 9.5% Marginal Tax Rate = 40%
Cost of Debt = 9.5% × (1 - 40%) Cost of Debt = 9.5% × 0.6 Cost of Debt = 5.7%
Therefore, the cost of debt for the firm is 5.7%.
The correct answer is D. 5.7%.