Question
Sunrise, Incorporated, is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is
Sunrise, Incorporated, is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is quoted at 109 percent of face value. The issue makes semiannual payments and has an embedded cost of 7.4 percent annually. a. What is the company's pretax cost of debt? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. If the tax rate is 24 percent, what is the aftertax cost of debt? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. Pretax cost of debt b. Aftertax cost fo debt % % 10 7.14 points eBook View previous attempt Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $5.2 million at the end of the first year, and these savings will grow at a rate of 3 percent per year, indefinitely. The firm has a target debt-equity ratio of .51, a cost of equity of 13.1 percent, and an aftertax cost of debt of 6.5 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects. a. Calculate the required return for the project. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What is the maximum cost the company would be willing to pay for this project? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. References a. Project required return b. Maximum to pay $ 13.87 % 47.84
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