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5) Craig Industries is issuing a $1,000 par value bond with an 7% semi-annual interest coupon...

5) Craig Industries is issuing a $1,000 par value bond with an 7% semi-annual interest coupon rate that matures in 15 years. Investors are willing to pay $982, and flotation costs will be 8%. Craig Industries is in the 35% tax bracket.

a) Calculate the before-tax cost of new debt for the bond

b) Calculate the after-tax cost of new debt for the bond

c) Why do companies use the after-tax cost of debt in determining their WACC (weighted average cost of capital)?

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