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19 October, 22:53

A bond has a coupon rate of 6 percent and the bond makes semiannual coupon payments. The dollar amount of coupon interest received every six months isa.$60. b.$30. c. $30 plus or minus the prorate portion of the discount or premium that the bond was purchased for. d. None of the above. 2.) Using the WACC in practice: Ronnie's Comics has found that its cost of common equity capital is 15 percent and its cost of debt capital is 12 percent. If the firm is financed with $250,000,000 of common shares (market value) and $750,000,000 of debt, then what is the after-tax weighted average cost of capital for Ronnie's if it is subject to a 35 percent marginal tax rate?

a.) 6.05%

b.) 9.60%

c.) 8.75%d

.) 13.65%

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  1. 20 October, 01:59
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    1.) A bond that pays coupons is referred to as a coupon paying bond while that which doesn't pay coupons is known as a Zero-coupon bond.

    The bond you are given bond has an annual coupon rate of 6% paid semiannually means that it will pay (6% / 2) = 3% every 6 months.

    Semiannual coupon payment = semiannual coupon rate * Face value

    The standard face value of a bond is $1000, therefore,

    Semiannual coupon payment = 3%*1000 = $30

    2.) WACC is weighted average cost of capital that takes into consideration the leverage effects of adding debt into a company's capital structure.

    The formula for calculating WACC = wE*rE + wD*rD (1-tax)

    wE = weight of equity = 250,000,000/1,000,000,000 = 0.25 or 25%

    rE = cost of equity = 15% or 0.15 as a decimal

    wD = weight of debt = 750,000,000/1,000,000,000 = 0.75 or 75%

    rD = pretax cost of debt = 12% or 0.12 as a decimal

    WACC = (0.25 * 0.15) + [ 0.75*0.12 (1-0.35) ]

    = 0.0375 + 0.0585

    = 0.096 or 9.6%

    Therefore, WACC is 9.60%
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