11 Quiz
2:15:56
Evan Desjardins: Attempt 1
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Gizmo Inc has outstanding 5 year bonds with a 12% coupon rate, annual payments selling for $1,300. Its preferred stock is selling
for $150 and pays a fixed dividend of $12. Gizmo Inc. common stock is selling for $200 and has a beta of 1. The risk-free rate is
5% and the expected return on the market is 12%. The target Capital structure calls for 40% debt, 20% Preferred Stock, and
40% Common Equity.
Gizmo Inc. is considering the purchase of a new machine for 200,000. It will be depreciated using the MACRS 3-year class life
[33%, 45%, 15% and 7%] and can be used for three years at which time it will have a market value of $30,000. Purchase of the
new machine will cause an increase in net operating working capital by $10,000. Sales are expected to increase by $100,000 per
year. The new machine will be depreciated using the MACRS 3-year class life.
The firm has a marginal tax rate of 40%.
Question 11 (1 point)
What is the before-tax cost of debt?
12.0%
5.1%
3.0%
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