MNQ Company's Pretax Cost Of Debt
MNQ Company 's pretax cost of debt is 7 percent. Refer to the data on the first and second tabs of the spreadsheet
SU_MBA6010_Final_Project_Information.xls provided in the Doc
Sharing area. For this part of the assignment only, assume that MNQ Company 's book value capital structure weights equal its market value capital structure weights.
Estimate the company 's cost of capital for 2008.
Submit your answers in a 3- to 5-page Microsoft Word document and your calculations in a Microsoft Excel sheet.
The cost of capital of a firm refers to the cost of fund of the firm. A firm can raise capital using debt, equity and preferred stock. The cost of different financing are different. Usually, cost of debt is lower than cost of equity as debt provides tax shield. The cost of capital of a firm depends on cost of debt, cost of equity, cost of preferred stock, and the capital structure of the firm. The cost of capital is calculated as: …show more content…
al., 2008)
Debt provides tax shield. Interest payment is deductible from income before tax payment. Thus, after tax cost of debt is lowered.
After tax Cost of capital = weight of debt*cost of debt(1-Tax rate) + weight of equity*cost of equity+ Weight of preferred stock*cost of preferred stock
The cost of debt is the rate of interest company pays on its borrowings. A company pays different rates on different borrowings as company does not borrow all borrowings at one rate. So, cost of debt can be calculated as:
Cost of debt = Total Interest Payment/Total long term debt
The cost of equity can be calculated using CAPM formula.
According to CAPM
SU_MBA6010_Final_Project_Information.xls provided in the Doc
Sharing area. For this part of the assignment only, assume that MNQ Company 's book value capital structure weights equal its market value capital structure weights.
Estimate the company 's cost of capital for 2008.
Submit your answers in a 3- to 5-page Microsoft Word document and your calculations in a Microsoft Excel sheet.
The cost of capital of a firm refers to the cost of fund of the firm. A firm can raise capital using debt, equity and preferred stock. The cost of different financing are different. Usually, cost of debt is lower than cost of equity as debt provides tax shield. The cost of capital of a firm depends on cost of debt, cost of equity, cost of preferred stock, and the capital structure of the firm. The cost of capital is calculated as: …show more content…
al., 2008)
Debt provides tax shield. Interest payment is deductible from income before tax payment. Thus, after tax cost of debt is lowered.
After tax Cost of capital = weight of debt*cost of debt(1-Tax rate) + weight of equity*cost of equity+ Weight of preferred stock*cost of preferred stock
The cost of debt is the rate of interest company pays on its borrowings. A company pays different rates on different borrowings as company does not borrow all borrowings at one rate. So, cost of debt can be calculated as:
Cost of debt = Total Interest Payment/Total long term debt
The cost of equity can be calculated using CAPM formula.
According to CAPM