Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Derivative Products And Pricing The Das Swaps And Financial Derivatives Library

Authors: Satyajit Das

1st Edition

0470821647, 9780470821640

More Books

Students also viewed these Finance questions