Ch$10.$ WACC

The BP Company's currently outstanding $10$ percent coupon bonds, paid semiannually, trade at the price of $$870$ and have maturity $15$ years with par value of $$1,000.$ BP believes it could issue new bonds that would provide a similar yield to maturity. If its marginal tax rate is $40\%,$ what is BP$\text{'}$s after tax cost of debt?

$5\mathrm{.}94\%**2=11\mathrm{.}88**0\mathrm{.}6=7\mathrm{.}13\%$

Title: WACC using New stock $($before$-$tax debt$)$

$2.$ K$.$ Corp. has determined that its before$-$tax cost of debt is $9\mathrm{.}0\%.$ Its cost of preferred stock is $10\mathrm{.}0\%.$ Its cost of internal equity is $15\mathrm{.}0\%,$ and its cost of external equity is $20\mathrm{.}0\%.$ Currently, the firm's capital structure has $$300$ million of debt, $$100$ million of preferred stock, and $$600$ million of common equity. The firm's marginal tax rate is $40\%.$ The firm is currently making projections for next period. Its managers have determined that the firm should have $$100$ million available from retained earnings for investment purposes next period. What is the firm's marginal cost of capital at a total investment level of $$200$ million?

$Be=\frac{100}{0\mathrm{.}6}=166\mathrm{.}67m<mn\; id="EditorElement\_197853">2</mn><mn\; id="EditorElement\_197854">0</mn><mn\; id="EditorElement\_197855">0</mn><mtext\; id="EditorElement\_197857"></mtext><mi\; id="EditorElement\_197858">g</mi><mi\; id="EditorElement\_197860">o</mi>$ external $.30\%**9**0\mathrm{.}6+10\%**10+60\%**20=14\mathrm{.}62\%$