Problems on Cost of Capital Computation Essay Example
Task 5: Cost of Capital
TIP: read your lecture, it has a link to an example of computing cost of capital!! http://www.expectationsinvesting.com/tutorial8.shtml
AirJet Best Parts Inc. is now considering that the appropriate discount rate for the new machine should be the cost of capital and would like to determine it. You will assist in the process of obtaining this rate.
1. Compute the cost of debt. Assume AirJet Best Parts Inc. is considering issuing new bonds. Select current bonds from one of the main competitors as a benchmark. Key competitors include Raytheon, Boeing, Lockheed Martin, and the Northrop Grumman Corporation.
a. What is the YTM of the competitor’s bond? You may use a number of sources, but we recommend Morningstar. Find the YTM of one 15 or 20 year bond with the highest possible creditworthiness. You may assume that new bonds issued by AirJet Best Parts, Inc. are of similar risk and will require the same return. (5 pts)
TIP: there is a document on their Doc Sharing "Finding_Stock_Info.pdf " that shows how to find the yield to maturity of bonds using MorningStar.com. Please use this document to update this information and if you have any questions, please post them on the Q&A section. Remember the YTM is always a percentage amount, not a dollar amount. There is no need for calculations here. You only need to observe the YTM posted on Morningstar for the bond.
b. What is the after-tax cost of debt if the tax rate is 34%? (5 pts)
TIP: Use the following formula:
Cost of debt (Bonds) = Current YTM of Bonds x (1-t)
where t is the tax rate of 34% and the YTM is the YTM you found under (a) above.
For instance, if the YTM you found is 5%, you will use the formula as follows:
Cost of debt = 0.05 x (1-0.34)
Remember the cost of any capital is always a percentage amount, not a dollar amount.
c. Explain what other methods you could have used to find the cost of debt for AirJet Best Parts Inc.(10 pts)
TIP: Please refer
TIP: read your lecture, it has a link to an example of computing cost of capital!! http://www.expectationsinvesting.com/tutorial8.shtml
AirJet Best Parts Inc. is now considering that the appropriate discount rate for the new machine should be the cost of capital and would like to determine it. You will assist in the process of obtaining this rate.
1. Compute the cost of debt. Assume AirJet Best Parts Inc. is considering issuing new bonds. Select current bonds from one of the main competitors as a benchmark. Key competitors include Raytheon, Boeing, Lockheed Martin, and the Northrop Grumman Corporation.
a. What is the YTM of the competitor’s bond? You may use a number of sources, but we recommend Morningstar. Find the YTM of one 15 or 20 year bond with the highest possible creditworthiness. You may assume that new bonds issued by AirJet Best Parts, Inc. are of similar risk and will require the same return. (5 pts)
TIP: there is a document on their Doc Sharing "Finding_Stock_Info.pdf " that shows how to find the yield to maturity of bonds using MorningStar.com. Please use this document to update this information and if you have any questions, please post them on the Q&A section. Remember the YTM is always a percentage amount, not a dollar amount. There is no need for calculations here. You only need to observe the YTM posted on Morningstar for the bond.
b. What is the after-tax cost of debt if the tax rate is 34%? (5 pts)
TIP: Use the following formula:
Cost of debt (Bonds) = Current YTM of Bonds x (1-t)
where t is the tax rate of 34% and the YTM is the YTM you found under (a) above.
For instance, if the YTM you found is 5%, you will use the formula as follows:
Cost of debt = 0.05 x (1-0.34)
Remember the cost of any capital is always a percentage amount, not a dollar amount.
c. Explain what other methods you could have used to find the cost of debt for AirJet Best Parts Inc.(10 pts)
TIP: Please refer