You know that the after-tax cost of debt capital for Bubbles Champagne is 4.1 percent. Assume that the firm has only one issue of five-year bonds outstanding. The bonds make semiannual coupon payments and the marginal tax rate is 30 percent.
a.
Calculate Pre-tax cost of debt capital. (Round intermediate calculations to 4 decimal places
78
To calculate the pre-tax cost of debt capital, we need to first calculate the after-tax cost of debt capital.
Given:
After-tax cost of debt capital = 4.1%
Marginal tax rate = 30%
The after-tax cost of debt capital is calculated as follows:
After-tax cost of debt capital = Pre-tax cost of debt capital * (1 - Marginal tax rate)
Let's substitute the known values into the equation:
4.1% = Pre-tax cost of debt capital * (1 - 0.30)
Simplifying the equation:
4.1% = Pre-tax cost of debt capital * 0.70
To isolate the Pre-tax cost of debt capital, divide both sides of the equation by 0.70:
Pre-tax cost of debt capital = 4.1% / 0.70
Now we can calculate the Pre-tax cost of debt capital:
Pre-tax cost of debt capital = 5.8571% (rounded to 4 decimal places)