Question

# (Cost of debt​) Sincere Stationery Corporation needs to raise ​\$450,000 to improve its manufacturing plant. It...

(Cost of debt​) Sincere Stationery Corporation needs to raise ​\$450,000 to improve its manufacturing plant. It has decided to issue a

​\$1,000 par value bond with an annual coupon rate of 15 percent and a maturity of 18 years. The investors require a rate of return of 14 percent.

a. Compute the market value of the bonds.

b. What will the net price be if flotation costs are 11 percent of the market​ price?

c. How many bonds will the firm have to issue to receive the needed​ funds?

d. What is the​ firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is

33 ​percent?

e. Rework the problem as​ follows: Assume a coupon rate of 9 percent.

f. What effect does changing the coupon rate have on the​ firm's after-tax cost of​ capital? Why is there a​ change?

a. If the​ bond's annual coupon rate is 15​%, what is the market value of the​ bond? ​\$_____ ​(Round to the nearest​ cent.)

b. What will the net price be if flotation costs are 11 percent of the market​ price? ​\$____ ​(Round to the nearest​ cent.)

c. How many bonds will the firm have to issue to receive the needed​ funds? ____bonds  ​(Round to the nearest whole​ number.)

d. What is the​ firm's after-tax cost of debt if its marginal tax rate is 33 ​percent? ______​% ​(Round to two decimal​ places.)

e. If the​ bond's annual coupon rate is 9​%, what is the market value of the​ bond? ​\$_____ ​(Round to the nearest​ cent.)

What will the net price be if flotation costs are 11 percent of the market​ price? \$______

How many bonds will the firm have to issue to receive the needed​ funds? _____bonds  ​(Round to the nearest whole​ number.)

What is the​ firm's after-tax cost of debt if its marginal tax rate is 33 ​percent? ______​% ​(Round to two decimal​ places.)

f. Which of the following statements best describes the effect of coupon rate on the​ firm's after-tax cost of​ debt?  ​(Select the best choice​ below.)

A. A lower coupon rate lowers the bond price and lowers the flotation cost. As a​ result, the​ after-tax cost of debt is slightly reduced.

B. A lower coupon rate increases the bond price and increases the flotation cost. As a​ result, the​ after-tax cost of debt is slightly raised.

C. A lower coupon rate increases the bond price but lowers the flotation cost. As a​ result, the​ after-tax cost of debt is slightly reduced.

D. A lower coupon rate lowers the bond price but increases the flotation cost. As a​ result, the​ after-tax cost of debt is slightly raised.

1.
=PV(14%,18,-15%*1000,-1000)=1064.6742046488

2.
=PV(14%,18,-15%*1000,-1000)*(1-11%)=947.560042137433

3.
=450000/(PV(14%,18,-15%*1000,-1000)*(1-11%))=474.903942746388

4.
=RATE(18,15%*1000,-PV(14%,18,-15%*1000,-1000)*(1-11%),1000)*(1-33%)=10.6507332952576%

5.
=PV(14%,18,-9%*1000,-1000)=676.628976755996

6.
=PV(14%,18,-9%*1000,-1000)*(1-11%)=602.199789312837

7.
=450000/(PV(14%,18,-9%*1000,-1000)*(1-11%))=747.260307934498

8.
=RATE(18,9%*1000,-PV(14%,18,-9%*1000,-1000)*(1-11%),1000)*(1-33%)=10.5531181428994%

9.
A lower coupon rate lowers the bond price and lowers the flotation cost. As a​ result, the​ after-tax cost of debt is slightly reduced.

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