Use the information below to answer the following question(s).Brandorf Company has two sources of funds: long term debt with a market and book value of $9 million issued at an interest rate of 10 percent; and, equity capital that has a market value of $6 million (book value of $2 million).The cost of equity capital is 5 percent, while the tax rate is 30 percent.Brandorf Company has profit centres in the following locations with the following data:

-A company's weighted-average cost of capital [WACC] was 9.6% last year.The company has $6,000,000 of bonds payable (its only debt)with a 9.25% coupon, and has $9,000,000 in equity capital.The tax rate is 35%.What is the company's cost of debt funding?
A)6.01%
B)6.25%
C)6.50%
D)9.25%
E)12.00%

Question

Use the information below to answer the following question(s).Brandorf Company has two sources of funds: long term debt with a market and book value of $9 million issued at an interest rate of 10 percent; and, equity capital that has a market value of $6 million (book value of $2 million).The cost of equity capital is 5 percent, while the tax rate is 30 percent.Brandorf Company has profit centres in the following locations with the following data:
 
-A company's weighted-average cost of capital [WACC] was 9.6% last year.The company has $6,000,000 of bonds payable (its only debt)with a 9.25% coupon, and has $9,000,000 in equity capital.The tax rate is 35%.What is the company's cost of debt funding?
A)6.01% 
B)6.25% 
C)6.50% 
D)9.25% 
E)12.00%

Quizplus · Accepted Answer

The cost of debt is calculated as the after-tax cost of the interest on the bonds. The formula is: Cost of Debt = Coupon Rate * (1 - Tax Rate). Therefore, 9.25% * (1 - 0.35) = 6.01%.

Use the Information Below to Answer the Following Question(s)