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In DEC 12, COEDEN CO, PART (A)
1. In the calculation of cost of debt where the answer sheet have shown that it is 4.9%. Isnt the formula for cost of debt should also take into consideration of tax ? why taxation is not taken into consideration in calculating this cost of debt ?
2. for obtaining b in the calculation of market value of equity, what is it actually mean by earnings retention rate ? because I read the textbook and I still have some difficulty grasping the concept
3. For the proportion of market value of equity and debt, they have divided into 50% and 50% respectively. However this information is not shown in the question……. So this is merely an assumption ???
1. The question says that the risk free rate is 4%, and that the credit spread on BBB rated bonds is 90 basis points. 4 + 0.90 = 4.90%
2. The retention rate is the amount retained divided by the earnings.
3. The market value of the debt is 42,344,400, and the market value of equity is 42,614,000 (the workings for both are shown in the answer). As is written in the answer, these values are near enough to being 50% debt and 50% equity.
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