Question

Sincere Stationary Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 12 percent annual coupon rate and a 10 year maturity. If floatation costs are 10.5 percent of the market price, how many bonds will the firm have to issue to receive the needed funds?

Give an example of why a company like Sincere Stationary Corporation would issue debt at 12 percent interest in today’s interest rate environment?

Answer 1

1. Issue Price of Bond = Par Value * (1 - Flotation Cost)

Issue Price of Bond = 1000 * (1 - 10.50%)

Issue Price of Bond = 1000 * 0.895

Issue Price of Bond = $895

how many bonds will the firm have to issue to receive the needed funds?

Amount Needed / Issue Price of Bond

$500000 / $895

559 Bonds (Rounded from 558.66 Bonds)

2.

The company will issue bonds to take maximum benefit from amount raised through tax shield on interest expense. had they issued equity shares they won't get tax benefit. Issuing debt @ 12% depends on the market interest rates, the issue price is $895 (Issued at Discount) means the market interest rates are more than coupon rate of 12% thats why issue price is less than par value.

Please Upvote if satisfied