Question

In: Finance

I. Cost of Debt Type of Debt Amount ($million) Weight Interest rate (%) Short-term debt US$...

I. Cost of Debt
Type of Debt	Amount ($million)	Weight	Interest rate (%)
Short-term debt	US$ 13,600		11.27%
Existing long-term debt	US$ 5,262		9.75%
Sub. Increasing-rate notes (Class I)	US$ 1,250		13.00%
Sub. Increasing-rate notes (Class II)	US$ 3,750		14.00%
Senior convertible debentures	US$ 1,800		14.50%
Partnership debt securities	US$ 500		11.20%
Total	US$ 26,162
After-tax cost of debt (tax rate @35.5%)

Expert Solution

Total Debt value = Value of Short-term debt + Value of Existing long-term debt + Value of Sub. Increasing-rate notes (Class I) + Value of Sub. Increasing-rate notes (Class II) + Value of Senior convertible debentures + Value of Partnership debt securities

=13600+5262+1250+3750+1800+500

=26162

Weight of Short-term debt = Value of Short-term debt/Total Debt Value

= 13600/26162

=0.5198

Weight of Existing long-term debt = Value of Existing long-term debt/Total Debt Value

= 5262/26162

=0.2011

Weight of Sub. Increasing-rate notes (Class I) = Value of Sub. Increasing-rate notes (Class I)/Total Debt Value

= 1250/26162

=0.0478

Weight of Sub. Increasing-rate notes (Class II) = Value of Sub. Increasing-rate notes (Class II)/Total Debt Value

= 3750/26162

=0.1433

Weight of Senior convertible debentures = Value of Senior convertible debentures/Total Debt Value

= 1800/26162

=0.0688

Weight of Partnership debt securities = Value of Partnership debt securities/Total Debt Value

= 500/26162

=0.0191

cost of Debt = Weight of Short-term debt*cost of Short-term debt+Weight of Existing long-term debt*cost of Existing long-term debt+Weight of Sub. Increasing-rate notes (Class I)*cost of Sub. Increasing-rate notes (Class I)+Weight of Sub. Increasing-rate notes (Class II)*cost of Sub. Increasing-rate notes (Class II)+Weight of Senior convertible debentures*cost of Senior convertible debentures+Weight of Partnership debt securities*cost of Partnership debt securities

cost of Debt = 0.1127*0.5198+0.0975*0.2011+0.13*0.0478+0.14*0.1433+0.145*0.0688+0.112*0.0191

cost of Debt = 0.1166 = 11.66%

After tax rate = YTM * (1-Tax rate)

After tax rate = 11.66 * (1-0.355)

After tax rate = 7.52

jeff jeffy answered 1 year ago

Let us say that long-term debt has an interest rate and short-term debt does not. Then...

Let us say that long-term debt has an interest rate and short-term debt does not. Then why not finance your entire operation with non interest bearing short-term payables? Could save you money! What does the current ratio really measure and should it vary depending on the certainty of sales revenue? Note: textbooks probably get this wrong in my opinion.

A firm uses INR 50 million of debt, INR 15 million of short-term debt, and INR...

A firm uses INR 50 million of debt, INR 15 million of short-term debt, and INR 90 million of common equity to finance its assets. If the before-tax cost of debt is 10%, after-tax cost of short-term debt is 8%, and the cost of common equity is 16%, calculate the weighted average cost of capital for the firm assuming a tax rate of 20%.

Select Financial Data Long-term debt $375.0 million Borrowing rate 8% Interest expense $30 million Tax rate...

Select Financial Data Long-term debt $375.0 million Borrowing rate 8% Interest expense $30 million Tax rate 35% Preferred stock dividends $8 million Earnings per share $0 Based on the preceding information, what is the EBIT that Liverpool Inc. must achieve in order to hit its financial breakeven point? 421.15 387.31 40.19 42.31 46.54 After further analysis, Liverpool Inc. has determined that it will not be issuing preferred dividends as it had previously planned. What sort of additional decision-making flexibility will...

Companies can use three basic type of financing in their business – short-term debt, long-term debt...

Companies can use three basic type of financing in their business – short-term debt, long-term debt and equity. Briefly discuss the nature of each and give examples. What are the possible consequences if a company uses short-term debt to fund long-term projects, and uses long-term debt or equity to pay current liabilities?

A. The (before-tax cost of debt/after-tax cost of debt) is the interest rate that a firm...

A. The (before-tax cost of debt/after-tax cost of debt) is the interest rate that a firm pays on any new debt financing. B. Perpetualcold Refrigeration Company (PRC) can borrow funds at an interest rate of 11.10% for a period of four years. Its marginal federal-plus-state tax rate is 45%. PRC’s after-tax cost of debt is (6.11%/7.03%/5.80%/6.72%) (rounded to two decimal places). C. At the present time, Perpetualcold Refrigeration Company (PRC) has 10-year noncallable bonds with a face value of $1,000...

Blunderbluss Manufacturing's balance sheets report $305 million in total debt, $64 million in short-term investments, and...

Blunderbluss Manufacturing's balance sheets report $305 million in total debt, $64 million in short-term investments, and $65 million in preferred stock. Blunderbluss has 5 million shares of common stock outstanding. A financial analyst estimated that Blunderbuss's value of operations is $850 million. What is the analyst's estimate of the intrinsic stock price per share? Round your answer to the nearest cent.

outline the advantages of using short term debt as opposed to long term debt in the...

outline the advantages of using short term debt as opposed to long term debt in the financing of working capital. support with references

Discuss when the cost of debt is different than the interest rate paid on debt and...

Discuss when the cost of debt is different than the interest rate paid on debt and why it is different. Discuss how to calculate the cost of debt when it is different than the interest rate paid on debt.

I am trying to determine the weight of long-term debt but don't know where to begin....

I am trying to determine the weight of long-term debt but don't know where to begin. I know the answer is 22.58% but I don't know how to get there. This is the problem: Problem 9-17 WACC Estimation The following table gives the balance sheet for Travellers Inn Inc. (TII), a company that was formed by merging a number of regional motel chains. Travellers Inn: (Millions of Dollars) Cash $10 Accounts payable $10 Accounts receivable 20 Accruals 10 Inventories 20...

Over time many large companies in the US have increased exponentially the amount of long-term debt...

Over time many large companies in the US have increased exponentially the amount of long-term debt taken out to finance operations. What are some other alternatives to long-term financing needs in an organization and is it less expensive than long term debt?