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A firm has a 28% tax rate and has decided to issue $250 million of 12-year...

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Finance

A firm has a 28% tax rate and has decided to issue $250 millionof 12-year debt. If it makes a U.S. public offering, the offeringwould carry an 8.5% coupon, paid semiannually, and issuing wouldcost $2 million. What is the after-tax cost (APY) of borrowing?

Answer & Explanation Solved by verified expert
4.0 Ratings (488 Votes)

flotation cost = issue cost/amount issued =2/250= 0.008

Cost of debt
                                         K = Nx4
Bond Price *(1-flotation %) =? [(Quarterly Coupon)/(1 + YTM/4)^k]     +   Par value/(1 + YTM/4)^Nx4
                                          k=1
                                         K =12x4
1000*(1-0.008) =? [(8.5*1000/400)/(1 + YTM/400)^k]     +   1000/(1 + YTM/400)^12x4
                                          k=1
YTM = 8.6075764778
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 8.6075764778*(1-0.28)

6.2%
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A firm has a 28% tax rate and has decided to issue $250 millionof 12-year debt. If it makes a U.S. public offering, the offeringwould carry an 8.5% coupon, paid semiannually, and issuing wouldcost $2 million. What is the after-tax cost (APY) of borrowing?

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