A Firm Has a Previous Debt Issue on Its Balance

question 33

Multiple Choice

A firm has a previous debt issue on its balance sheet that pays coupons of 8% annually. Newer bonds with equivalent maturity would have 10% annual coupons in order to sell at par value. Based on this information, which statement is true?

• A)The existing bonds would sell for more than par value.
• B)The WACC calculation should use 8% as the cost of debt.
• C)The WACC calculation should use a value higher than 10% as the cost of debt.
• D)The existing bonds would sell at discount.

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Definitions:

Marginal Tax Rates

The rate at which the last dollar of income is taxed, reflecting the percentage of tax applied to your income for each tax bracket in which you qualify.

Interest Income

Earnings generated from the lending of money or from deposit funds in interest-bearing accounts.

Eligible Dividends

Dividends designated by a corporation to be eligible for a lower tax rate on the dividend income received by an individual shareholder.

Tax Paid

Refers to the total amount of taxes remitted to the relevant tax authorities for income, sales, property, or other forms of taxes.