Question

(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?

NEED ANSWER TO THESE:

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.

Answer #1

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
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