Question

incere Stationery Corporation needs to raise ?$700,000 to improve its manufacturing plant. It has decided to issue a ?$1,000 par value bond with an annual coupon rate of 11 percent and a maturity of 19 years. The investors require a rate of return of 13 percent. a. Compute the market value of the bonds. b. What will the net price be if flotation costs are 12 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 36 ?percent?

Answer 1

Requirement (a) - Market value of the Bonds = $861.24

Market Value of the Bond = Present Value of Coupon Interest + Present Value of Par Value

= { $110 x [ PVIFA 13% , 19 Years ] } + { $1,000 x [ PVIF 13%, 19 Years ] }

= [ $110 x 6.937969] + [ $1,000 x 0.098063]

= $ 763.18 + 98.06

= $861.24

Requirement (b) –Net Price = $757.89

Net price be if flotation costs are 12 percent of the market? price

= Market Price x [ 1 – Flotation Cost ]

= $861.24 x [ 1 – 0.12 ]

= $757.89

Requirement (c) – Number of bonds will the firm have to issue to receive the needed? funds = 813 Bonds

Number of bonds = Needed Fund / Market Value of the Bond

= $700,000 / $861.24

= 813 Bonds

Requirement (d) - Firm's after-tax cost of debt = 8.32%

Firm's after-tax cost of debt = 13% x [ 1 – Tax Rate ]

= 13% x [ 1 – 0.36 ]

= 8.32%