Question

**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 costs were 12% of the bond issue? Round
your answer to two decimal places.

Answer #1

Sol:

We are required to calculate Cost of Debt after tax (Kad)

**Formula for computation of Cost of debt (Kda)** =
**Interest (1 - tax) / Net proceeds**

From the given data we have:

**CASE - 1** : Coupon Rate = 10%, Face value of
bond = $1000 , **Floatation cost = 5%** and Tax rate =
35%

Flotation cost = 1000000* 5% = 50000 $

Net Proceeds = Debt raised- Flotation cost

= $1000000 - $ 50000

= $ 950000

Therefore Cost of Debt after tax (Kda) = $1000000*10% (1-.35) / $950000

= $65000 / $950000

= **6.84%**

**CASE - 2** : Coupon Rate = 10%, Face value of
bond = $1000 , **Floatation cost = 12%** and Tax rate
= 35%

Floatation cost = $1000000 * 12% = $120000

Net Proceeds = Debt raised- Flotation cost

= $1000000 - $120000

= $ 880000

Therefore Cost of Debt after tax (Kda) = $1000000*10% (1-.35) / $880000

= $65000 / $880000

= **7.39%**

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?...

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. %

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. ____%

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?

The Cost of Equity and Flotation Costs
Messman Manufacturing will issue common stock to the public for
$30. The expected dividend and the growth in dividends are $4.00
per share and 5%, respectively. If the flotation cost is 11% of the
issue's gross proceeds, what is the cost of external equity,
re? Round your answer to two decimal places.
__%
The Cost of Debt and Flotation Costs.
Suppose a company will issue new 25-year debt with a par value
of...

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?

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 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?

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