T/F: The return on debt (rd) to be used in computing for the after-tax cost of debt

can be the coupon rate, if it is the same with the yield-to-maturity (YTM).
True

False

T/F The rationale why cost of debt is adjusted for taxes is because interest
expense reduces the company's net income.

obe's Co.'s interest rate for its outstanding debt (as recorded in its BS) is 10%.
Kobe can borrow from a bank for its capital expenditures at an interest rate of 9%.
If the marginal tax rate is 30%, what is Kobe's after-tax cost of debt for WACC
purposes? (Answer in this format: e.g. 7%, 9.50%, 12.25%)

Which of the following can be considered as before-tax cost of debt?

Cost of debt used for calculating WACC
Expected return on debt
Net cost of debt
Cost of debt including tax deductibility of interest
T/F: In specific instances, flotation costs are not included in computing for the
rd or return on debt (specifically, the YTM) to arrive at the after-tax cost of
debt because using debt incurs no flotation costs.

Karl Company. has the following information pertaining to its preferred stocks:

Par Value = P100 Stock Price = P90 Annual Dividend = 10%.

What is Karl's cost of preferred stocks\? (Answer in this format: e.g. 7%, 9.50%,
12.25%

T/F: Use of retained earnings as a source of equity fund has a cost because
dividends to be paid come from retained earnings.

Carl Inc. has the following information pertaining to its debt and equity:

Year-end dividend = P5 Stock price = P60 Growth rate = 3.5% Risk-

free rate = 4%

MRP = 4% Interest rate on its bonds = 6%

Carl Inc. is considered as a high-risk company. Using the bond-yield-plus-risk-

premium approach, what is Carl's cost of retained earnings (rs)? (Answer in this
format: e.g. 7%, 9.50%, 12.25%)

In relation to the immediately preceding problem, assume that you have the highest
confidence in the inputs for the DCF (DDM) approach. What will be Carl's cost of
internal equity (rs)? (Answer in this format: e.g. 7%, 9.50%, 12.25%)
When inflation increases, what will happen to the cost of debt and cost of equity?
Cost of Debt Cost of Equity

Christian Paints Corporation has a targeted capital structure of 60% debt and 40%
equity. Its YTM is 9% and marginal tax rate is 40%. The current stock price is P25.
Christian's beta is 1.20. The average return on the market is 10%. Treasury bills
yield 3%. What is Christian's WACC? (Answer in this format: e.g. 7%, 9.50%,
12.25%)