Question

Smith Stationary Ltd needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 face value bond with a 8% annual coupon rate paid semi-annually and a 5-year maturity. The investors require 10% rate of return. a.Calculate the price of this bond. How many bonds need to be issued to receive the required amount of fund? b.What is the firm after-taxed cost of debt given the tax rate is 30%

Answer 1

a

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =5x2

Bond Price =∑ [(8*1000/200)/(1 + 10/200)^k]     +   1000/(1 + 10/200)^5x2

k=1

Bond Price = 922.78

b

Number of bonds to issued = amount /bond price = 500000/922.78=541.84

c

After tax rate = YTM * (1-Tax rate)

After tax rate = 10 * (1-0.3)

After tax rate = 7