Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. accounting
  3. the cost of debt what do lenders require, and what

The cost of debt What do lenders require, and what kind of debt costs the...

90.2K

Verified Solution

Question

Accounting

image

The cost of debt What do lenders require, and what kind of debt costs the company? The cost of debt that is relevant when companies are evaluating new investment projects is the marginal cost of the new debt to be raised to finance the new project. Consider the case of Purple Lemon Fruit Company: Purple Lemon Fruit Company is considering issuing a new 20-year debt issue that would pay an annual coupon payment of $80. Each bond in the issue would carry a $1,000 par value and would be expected to be sold for a price equal to its par value. Purple Lemon's CFO has pointed out that the firm would incur a flotation cost of 1% when initially issuing the bond issue. Remember, the flotation costs will be _____ from the proceeds the firm will receive after issuing its new bonds. The firm's marginal federal-plus-state tax rate is 30%. To see the effect of flotation costs on Purple Lemon's after-tax cost of debt (generic), calculate the after-tax cost of the firm's debt issue with and without its flotation costs, and select the correct after-tax costs from the following boxes. This is the cost of ______ debt, and it is different from the average cost of capital raised in the past

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students