(Bonds) A company has an outstanding issue of $1000 face value bonds with 8.75% annual coupon...

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(Bonds) A company has an outstanding issue of $1000 face valuebonds with 8.75% annual coupon and 10 years remaining untilmaturity. The bonds are currently selling at a price of 82.50(82.50% of face value). The company wishes to sell a new a bondissue with a 30-year maturity. Their investment bank has advisedthat (1) the new 30-year issue could be sold for a flotation costof 3% of face value, and (2) current yield curves indicate that30-year maturity bonds yield a nominal 75 basis points (0.75%) morethan 10 year maturity bonds on average. The company is in the 35%tax bracket.
a. Calculate investors' required rate of return today.
b. What annual coupon would have to be placed on the new issuein order for it to sell at par?
c. Calculate the flotation cost and tax savings from theproposed new issue.
d. Calculate the cost of the new bond financing.

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4.3 Ratings (897 Votes)

Part a Yield of 10 year maturity bonds RATE period PMT PV FV RATE 10 875 x 1000 8250 x 1000 100 1183 Investors required rate of return today a nominal 75 basis points 075 more than 10 year maturity bonds on average 075 See Answer

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