After-tax cost of debt capital

The lead software engineer at SafeSoft, a food industry service corporation, has convinced the president to develop new software technology for the meat and food safety industry. It is envisioned that processes for prepared meats can be completed more safely and faster using this automated control software. A common stock issue is a possibility to raise capital if the cost of equity capital is below 15%. SafeSoft, which has a historical beta value of 1.7, uses CAPM to determine the premium of its stock compared to other software corporations. The security market line indicates that a 5% premium above the risk-free rate is desirable.

If U.S. Treasury bills are paying 4%, estimate the cost of common stock capital.

The Hershey Company will purchase a $20,000 10-year-life asset. Company managers have decided to put $10,000 down now and borrow $10,000 at an interest rate of 6%. The simplified loan repayment plan is $600 in interest each year, with the entire $10,000 principal paid in year 10.

What is the after-tax cost of debt capital if the effective tax rate is 42%?


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