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posted by  ihatetina on 10/20/2009 2:04:46 AM  |  status: Closed  |  Earned Karma: 50

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N/A N/A N/A N/A 10/21/2009 at 2:00:00 PM
Question Details:
 
A project's payback period is determined to be four years. If it is later discovered that additional cash flows will be generated in years five and six, then: 
A. the project's payback period will be reduced
B. the project's payback period will be increased.
C. the project's payback period will be unchanged
D. the discount rate must be known to determine whether the payback period changes.
 What is the pretax cost of debt for a firm in the 35% tax bracket that has a 10% after-tax cost of debt? 
A. 5.85%
B. 12.15%
C. 15.38%
D. 25.71%
  What appears to be the targeted debt ratio of a firm that issues $15 million in bonds and $35 million in equity to finance its new capital projects? 
A. 15.00%B. 30.00%C. 35.00%D. 60.00%
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(SME)
posted by devis on 10/20/2009 4:12:28 AM  |  status: Live
Asker's Rating: Lifesaver   
Response Details:
(1)  Option ( c) the project’s payback period will be unchanged
(2)    Calculating Pre-tax Cost of Debt:
               After-tax Cost of Debt = 10%
               Pre-tax Cost of Debt      = X (1-0.35) = 10%
               Pre-tax Cost of Debt      = X (0.65)   = 0.10
               Pre-tax Cost of Debt      = 0.1538 (or) 15.38%








(3) Calculating Targeted Debt Ratio:
                Debt                      $15,000,000
                Equity                    $35,000,000
                                        ---------------
                 TOTAL                    $50,000,000
                                         ---------------
               Targeted Debt Ratio    = $15,000,000 / $50,000,000
               Targeted Debt Ratio    =   0.30 (or) 30%                         
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