1-

The Goodsmith Charitable Foundation, which is tax-exempt, issued debt last year at 14 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 30 percent higher; that is, firms that paid 16 percent for debt last year will be paying 20.80 percent this year.

a. If the Goodsmith Charitable Foundation borrowed money this year, what would the aftertax cost of debt be, based on their cost last year and the 30 percent increase? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Aftertax cost of debt_________%

b. If the receipts of the foundation were found to be taxable by the IRS (at a rate of 20 percent because of involvement in political activities), what would the aftertax cost of debt be? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Aftertax cost of debt_________%

2-

Keyspan corp. is planning to issue debt that will mature in 2,030. In many respects, the issue is similar to the currently outstanding debt of the corporation.

a. Calculate the yield to maturity on similarly outstanding debt for the firm, in terms of maturity. (Input your answer as a percent rounded to 2 decimal places.)

Yield______%

Assume that because the new debt wil be issued at par, the required yield to maturity will be .25 percent higher than the value determined in part a.

b. What is the new yield to maturity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Yield______%

c. If the firm is in a 35 percent tax bracket, what is the aftertax cost of debt for the yield determined in part b? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Aftertax cost of debt________%