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Q1. (25 marks) The Royal Inc is currently in the business of making kitchen cabinets. It has $400.000 in outstanding bonds with a coupon rate
Q1. (25 marks) The Royal Inc is currently in the business of making kitchen cabinets. It has $400.000 in outstanding bonds with a coupon rate of 8% and a yield-to-maturity of 75%. The company is seeking additional financing so it can start a new venture, which involves the sales and installation of patio rooms, including spas and hot tubs. Its biggest competitor, who specializes solely in patio rooms, has $600,000 in outstanding bonds with a 9% coupon rate and an 11% yield to-maturity. Royal's marginal tax rate is 35% and the competitor's marginal tax rate is 34% What after-tax rate cost of debt should the Royal Inc use in its WACC calculation? Which source of capital structure is likely to provide more tax related benefit? (Show detailed calculations) hp
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