9-9. Sincere Stationary Corporation needs to raise $500,000 to improve its manuf

Question

9-9. Sincere Stationary Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 14 percent annual couppn rate and a 10-year mautrity. The investors require a 9 percent rate of return.

a. Compute the market value of the bonds.

b. What will the net price be if flotation costs are 10.5 percent of the market price?

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

d. What is the firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 34 percent?

A.) Rework 9-9 as follows: Assume an 8 percent coupn rate. What effect dos changing the coupon rate have on the firm's afer-tax cost of capital?

B.) Why is there a change?

Explanation / Answer

Solution:

We have C = 0.14*1000 = $140, FV = $1000, n = 10 and I = 9%

a) Price of bond = C*(PVIFA @ I, n) + FV*(PVIF @ I, n)

= 140*(PVIFA @ 9%, 10) + 1000*(PVIF @ 9%, 10)

= 140*(6.418) + $1000(.422)

= $1320.52

b) Net Price = Value of bond*(1

Related Questions

Navigate

• Browse (All)
• Browse 9
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.