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The Cost of Debt and Flotation Costs. Suppose a company will issue new 25-year debt with...

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Finance

The Cost of Debt and Flotation Costs.

Suppose a company will issue new 25-year debt with a par valueof $1,000 and a coupon rate of 9%, paid annually. The issue pricewill be $1,000. The tax rate is 35%. If the flotation cost is 2% ofthe issue proceeds, then what is the after-tax cost of debt?Disregard the tax shield from the amortization of flotation costs.Round your answer to two decimal places.
  %

What if the flotation costs were 11% of the bond issue? Roundyour answer to two decimal places.

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4.2 Ratings (797 Votes)

Cost of debt
                                         K = N
Bond Price *(1-flotation %) =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                                          k=1
                                         K =25
980*(1-0.02) =? [(9*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^25
                                          k=1
YTM = 9.207038074
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 9.207038074*(1-0.35)
= 5.99
Cost of debt
                                         K = N
Bond Price *(1-flotation %) =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                                          k=1
                                         K =25
890*(1-0.11) =? [(9*1000/100)/(1 + YTM/100)^k]     +   1000/(1 + YTM/100)^25
                                          k=1
YTM = 10.2336862709
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 10.2336862709*(1-0.35)
= 6.65

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The Cost of Debt and Flotation Costs.Suppose a company will issue new 25-year debt with a par valueof $1,000 and a coupon rate of 9%, paid annually. The issue pricewill be $1,000. The tax rate is 35%. If the flotation cost is 2% ofthe issue proceeds, then what is the after-tax cost of debt?Disregard the tax shield from the amortization of flotation costs.Round your answer to two decimal places.  %What if the flotation costs were 11% of the bond issue? Roundyour answer to two decimal places.

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