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? (two decimal places only)
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? (two decimal places only)
A) 6.01% 
B) 6.25% 
C) 6.50% 
D) 9.25% 
E) 12.00%

Quizplus · Accepted Answer

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

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