Question

​(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 _____ ?

Answer 1

Answer:

Market price of bond = $950

Net Proceeds from bond = Market price - Flotation cost = $950 - 9% * $950

= $864.50

Par value of bond = $1,000

Rate of interest bond pays (annually) = 8%

Maturity duration = 9 years

Yearly Interest payments ( for 9 years) = $1,000 * 8% = $80

At the end of 9 year maturity value = $1,000

So, we need to calculate Rate from excel:

=Rate (npr, PMT, PV, FV)

=Rate (9.80.-864.50,1000)

= 10.3894%

After tax cost of debt = Rate * (1 - tax rate)

=10.3894% * (1 - 20% )

= 8.3115%

The​ firm's after-tax cost of debt on the bond will be 8.3115%