1) Goofy Gas Works has bonds that mature in 10 years The bonds have a 10% coupon

Question

1) Goofy Gas Works has bonds that mature in 10 years

The bonds have a 10% coupon rate paid quarterly.

They have a before tax cost of debt of 8% and a tax bracket of 35%

What is the cost of debt? Answer should be 5.2%, need work to justify all answers.

2) Wild Child Motors has a 12 year bond that carries an 8% semi-annual coupon rate and a nominal yield to maturity of 6%. The firm incurs flotation costs of 3% of the price of the bond. What is the cost of the debt if the firm is in the 40% tax bracket? answer should be 3.83%

3) Jolly Jelly bean Co. has a bond with a 12 year maturity date and a 9% Semi-annual coupon rate.The bond had a Nominal yield to maturity of 7%. The firm would pay $3 flotation cost. What is the bonds cost of debt if the firm is in the 35% tax bracket? answer should be 4.58%

Please help with all 3 problems!!!!

Explanation / Answer

1)

cost of debt = 8 * (1-0.35) = 5.2%

2)

price of bond = 40 * [1-(1+0.03)^-24]/0.03 + 1000/1.03^24

= 1169.36

price of bond after flotation cost = 1169.36 * 0.97 = 1134.27

40 * [1-(1+r)^-24]/r + 1000/1+r^24 = 1134.27

r = 6.3833%

cost of debt = 6.3833 * (1-0.4) = 3.83%

3)

price of bond = 45 * [1-(1+0.035)^-24]/0.035 + 1000/1.035^24

= 1160.58

price of bond after flotation cost = 1160.58 -3 = 1157.58

45 * [1-(1+r)^-24]/r + 1000/1+r^24 = 1157.58

r = 7.046%

cost of debt = 7.046 * (1-0.35) = 4.58%

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