Question
8. DBF borrows $5.95B by issuing 24-year bonds. ECB's cost of debt is 10.69%, so it will need to pay interest each year for the
8. DBF borrows $5.95B by issuing 24-year bonds. ECB's cost of debt is 10.69%, so it will need to pay interest each year for the next 24 years, and then repay the principal $5.95B in year 24. ECB's marginal tax rate will remain 42.61% throughout this period. By how much does the interest tax shield increase the value of DBF?
a. Axon Industries needs to raise $22.69M for a new investment project. If the firm issues one-year debt, it may haveto pay an interest rate of 9.38 %, although Axon's managers believe that 5.36 % would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 11.92 %. What is the cost to current shareholders of financing the project out of debt?
b. Axon Industries needs to raise $24.65M for a new investment project. If the firm issues one-year debt, it may haveto pay an interest rate of 7.95 %, although Axon's managers believe that 5.62 % would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 11.63 %. What is the cost to current shareholders of financing the project out of Equity?
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