The firm currently has one issue of bonds outstanding. The bonds have a par value of...

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The firm currently has one issue of bonds outstanding. The bondshave a par value of ?$1 comma 000 per? bond, carry a coupon rate of8 ?percent, have 14 years to? maturity, and are selling for ?$1,070. ?Nealon's common stock has a current market price of $ 36?,and the firm paid a ?$2.60 dividend last year that is expected toincrease at an annual rate of 6 percent for the foreseeable future.What is the cost of new debt financing to Nealon based on currentmarket prices after both taxes? (you may use a marginal tax rate of34 percent for your? estimate) and flotation costs of ?$30 per bondhave been? considered?

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3.6 Ratings (381 Votes)


	Cost of Bonds:
	Par value of Bond	$1,000
Pmt	Annual coupon payment	$80	(8%*1000)
Nper	Number of years to maturity	14
Pv	Present market price	$1,070
Fv	Payment at maturity	$1,000
RATE	Yield to maturity	7.2%	(Using RATE function of excel with Nper=14,Pmt=80,Pv=-1070, Fv=1000)
	ExcelCommand:RATE(14,80,-1070,1000)

	Flotation Cost per bond	$30
	Before tax Cost of Bond =(72/(1000-30))*100	7.4%
	After tax cost of debt financing:
	7.4(1-tax rate)=7.4(1-0.34)=	4.9%

	COST OF NEW DEBT FINANCING	4.9%

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Transcribed Image Text

The firm currently has one issue of bonds outstanding. The bondshave a par value of ?$1 comma 000 per? bond, carry a coupon rate of8 ?percent, have 14 years to? maturity, and are selling for ?$1,070. ?Nealon's common stock has a current market price of $ 36?,and the firm paid a ?$2.60 dividend last year that is expected toincrease at an annual rate of 6 percent for the foreseeable future.What is the cost of new debt financing to Nealon based on currentmarket prices after both taxes? (you may use a marginal tax rate of34 percent for your? estimate) and flotation costs of ?$30 per bondhave been? considered?