Accounting

A new program in genetics engineering at Gentex will require $10 milljon in capital. The chief financial officer (CFO) has estimated the following amounts of financing at the indicated interest rates: Common stock sales Use of retained earnings Debt financing through bonds $5 million at 13.7% $2 million at 8.9% $3 million at 7.5% Historically, Gentex has financed projects using a D-E mix of 40% from debt sources costing 7.5%, and 60% from equity sources costing 10.0%.

Compare the historical WACC value with that for trus current genetics program.

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AT&T will generate $5 million in debt capital by issuing five thousand $1000 8% per year 10-year bonds. If the effective tax rate of the company is 50% and the bonds are discounted 2% for quick sale, compute the cost of debt capital (a) before taxes and (b) after taxes from the company perspective. Obtain the answers by hand and by computer.

 

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