Question

Prince Company is contemplating a bond issue at par with the following terms. What is the...

Prince Company is contemplating a bond issue at par with the following terms. What is the after tax cost of debt? 20 years, 9 % coupon, par value $1000. Flotation costs $40. Show work.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

After Tax Cost of Debt is calculated as below :

Par Value (fv) = $ 1,000

Price after flotation cost (pv) = 1000 - 40

= $ 960

Coupon rate = 9%

Coupon Payments (pmt) = 9% * 1000

= $ 90

Time period (nper) = 20 years

Using the Excel sheet calculator with the formula below, we can calculate the yield to maturity of the bond as :

=RATE(nper,pmt,-pv,fv)

=RATE(20,90,-960,1000)

= 9.4524%

Now Cost of debt = Yield to Maturity * ( 1 - tax rate )

= 9.4524 * ( 1 - 35% )

= 6.144%

**Please note that as there is no details of the tax rate given, I am considering the Tax rate to be 35%

Just use the tax rate which ever applicable in the formula where I have used 35% to reach the desired result.

Hope I am able to solve your concern. If you are satisfied hit a thumbs up !!

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The Cost of Debt and Flotation Costs Suppose a company will issue new 20-year debt with...
The Cost of Debt and Flotation Costs Suppose a company will issue new 20-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The issue price will be $1,000. The tax rate is 40%. If the flotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt? What if the flotation costs were 10% of the bond issue?
Suppose a company will issue new 15-year debt with a par value of $1,000 and a...
Suppose a company will issue new 15-year debt with a par value of $1,000 and a coupon rate of 8%, paid annually. The issue price will be $1,000. The tax rate is 40%. a. If the flotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt? b. What if the flotation costs were 10% of the bond issue? CAN YOU SHOW STEPS
Suppose a company will issue new 15-year debt with a par value of $1,000 and a...
Suppose a company will issue new 15-year debt with a par value of $1,000 and a coupon rate of 8%, paid annually. The issue price will be $1,000. The tax rate is 40%. a. If the flotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt? b. What if the flotation costs were 10% of the bond issue?
uppose a company will issue new 20-year debt with a par value of $1,000 and a...
uppose a company will issue new 20-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The tax rate is 35%. If the flotation cost is 5% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs. Round your answer to two decimal places. %
uppose a company will issue new 25-year debt with a par value of $1,000 and a...
uppose a company will issue new 25-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The issue price will be $1,000. The tax rate is 35%. If the flotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs. Round your answer to two decimal places.   % What if the flotation costs were 11% of the bond issue?...
Suppose a company will issue new 25-year debt with a par value of $1,000 and a...
Suppose a company will issue new 25-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The issue price will be $1,000. The tax rate is 25%. If the flotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt? Round your answer to two decimal places. ____% What if the flotation costs were 10% of the bond issue? Round your answer to two decimal places. ____%
Suppose a company will issue new 20-year debt with a par value of $1,000 and a...
Suppose a company will issue new 20-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The issue price will be $1,000. The tax rate is 25%. If the f lotation cost is 2% of the issue proceeds, then what is the after-tax cost of debt? What if the f lota-tion costs were 10% of the bond issue?
​(Cost of debt​) Carraway Seed Company is issuing a ​$1 comma 000 par value bond that...
​(Cost of debt​) Carraway Seed Company is issuing a ​$1 comma 000 par value bond that pays 8 percent annual interest and matures in 9 years. Investors are willing to pay ​$950 for the bond. Flotation costs will be 9 percent of market value. The company is in a 20 percent tax bracket. What will be the​ firm's after-tax cost of debt on the​ bond? The​ firm's after-tax cost of debt on the bond will be _____ ?
Sample company is considering issuing a new 20 year debt issue that would pay an annual...
Sample company is considering issuing a new 20 year debt issue that would pay an annual coupon payment of $90. Each bond in the issue would carry a $1,000 par value and would be expected to be sold for a price equal to it par value. Sample point out that the firm would incur a floatation cost of 2% when initially issuing the bond issue. Remember, the flotation cost will be --------- (subtracted or added) from the proceeds the firm...
The Cost of Debt and Flotation Costs. Suppose a company will issue new 25-year debt with...
The Cost of Debt and Flotation Costs. Suppose a company will issue new 25-year debt with a par value of $1,000 and a coupon rate of 10%, paid annually. The issue price will be $1,000. The tax rate is 35%. If the flotation cost is 5% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs. Round your answer to two decimal places.    What if the flotation...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT