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A Firm Has Issued $20 Million in Long-Term Bonds That

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Essay

A firm has issued $20 million in long-term bonds that now have 10 years remaining until maturity.The bonds carry an 8% annual coupon but are selling in the market for $877.10.The firm also has $45 million in market value of common stock.For cost of capital purposes, what portion of the firm is debt financed and what is the after-tax cost of debt?


Definitions:

Compromise

A method of resolving conflict whereby parties involved agree on concessions or adjustments to their demands or positions to reach a mutually acceptable solution.

Compliance

The act of conforming to a request or demand, often from a figure of authority.

Conformity

The act of matching attitudes, beliefs, and behaviors to group norms, politics, or being similar to others.

Social Pressure

The influence exerted by society or a social group on an individual to conform to expected norms and behaviors.

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