Consider the after-tax cash flows below from a project that is being considered
ID: 2731850 • Letter: C
Question
Consider the after-tax cash flows below from a project that is being considered by Despondus Corportation. Since the project is an extension of the firm's current business, it carries the same risk as the overall firm.
Despondus Corporation's common stock is currently priced at $44.62, and there are 684,000,000 shares outstanding. A dividend of $3.73 per share was just paid and dividends are expected to grow at a constant rate of 5.87% per year. The company has 7,300,000 bonds outstanding that mature in 10 years and are currently prices at 1,015 per bond. The coupon rate is 14.48%, and the bonds make semiannual interest payments. The company's tax rate is 34%.
WHAT IS DESPONDUS COPORATION'S AFTER-TAX COST OF DEBT?
Correct answer:
N=20
PV= -1015
PMT = 72.4
FV= 1000
CPT I = 7.097338 X 2 = 14.194675%
14.194675% X (1-.34) = 9.37%
MY QUESTION IS HOW DID THEY GET 72.4 FOR THE PMT? I DONT UNDERSTAND WHERE THAT NUMBER IS COMING FROM
YEAR 0 1 2 3 4 5 CASH FLOWS -251,000 94,000 65,000 112,000 94,000 104,000Explanation / Answer
The PMT is calculated by multiplying the face value of the bond with the semannual interest rate i.e 1000*7.24%=72.4(Semiannual interest rate = 14.48/2 = 7.24%)