?(Cost of? debt)??Sincere Stationery Corporation needs to raise ?$546 000 to imp

Question

?(Cost of? debt)??Sincere Stationery Corporation needs to raise ?$546 000 to improve its manufacturing plant. It has decided to issue a ?$1000 par value bond with an annual coupon rate of 11.9 percent with interest paid semiannually and a 10?-year maturity. Investors require a rate of return of 8.4 percent.

a. Compute the market value of the bonds.

b.??How many bonds will the firm have to issue to receive the needed? funds?

c.??What is the? firm's after-tax cost of debt if the? firm's tax rate is 34 ?percent?

Explanation / Answer

a. Using financial calculator or excel :

Formula : PV (Rate,Nper,pmt, fv)

Input : Rate = 8.4 % /2 , Nper = 10*2 , Pmt = (1000 *11.9%) /2 , fv = 1000

Putting the values in the formula : PV(8.4%/2,20,119/2,1000)

Market Value of the bonds = $1,233.67

b. No of bonds required = Required Funds / Marker Value of the Bonds

= 546,000 / 1233.67

= 443 bonds(rounded off)

c.

Using financial calculator or excel :

Formula : Rate (Nper,pmt, pv, fv)

Input : Nper = 10*2 , Pmt = (1000 *11.9%) /2 , pv = 1233.67, fv = 1000

Putting the values in the formula : Rate (20,119/2,1233.67, 1000)

Rate = 6%

After tax cost of debt = 6% * ( 1-0.34) = 3.96%

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