Question
1- Lipscott Inc. is a publicly traded company that has $100 million in bank loan on its books, with a stated interest rate of 3%
1- Lipscott Inc. is a publicly traded company that has $100 million in bank loan on its books, with a stated interest rate of 3% and $150 million in publicly traded bonds, with a coupon rate of 3.6%. The company currently has a bond rating of BBB, with a default spread of 1.5% over the risk free rate. If the current T.Bill rate is 1%, the ten-year T.Bond rate is 3.5% and the marginal tax rate is 35%, what is the pre-tax cost of debt?
a. 3.36%
b. 3.60%
c. 5.00%
d. 2.50%
2- Faraday Enterprises is a publicly traded company. It currently has 10 million shares trading at $12/share and $150 million in book value of equity. The firm also has book value of debt of $ 75 million and market value of debt of $ 80 million. The cost of equity for the company is 9%, the pre-tax cost of debt is 4% and the marginal tax rate is 40%. What is the cost of capital?
3- To find out the risk free rate of a country that is likely to have default risk, we find the default risk premium. Now lets assume in November 2014, 10-year India US $ bond, denominated in US dollars had a yield of 5.25% and the US 10-year T.Bond rate traded at 2.75%. On the other hand, we find that the CDS spread for India in November 2014 was 3.10%. What is the default spread calculated India US $ bonds? why the default spread calculated is different from the spread found in CDS market?
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