A bond that has $1,000 par value (face value) and a contract or coupon interest

Question

A bond that has $1,000 par value (face value) and a contract or coupon interest rate of 9 percent A new issue would have a floatation cost of 5 percent of the SI.140 market value. Hie bonds mature in 13 years. The firm's average tax rate is 30 percent and its marginal tax rate is 34 percent. b. A new common stock issue that paid a SI.70 dividend last year. The par value of the stock is S15, and earnings per share have grown at a rate of 7 percent per year This growth rate is expected to continue into the foreseeable future The company maintains a constant dividend- earnings ratio of 30 percent The price of this stock is now S31, but 7 percent flotation costs are anticipated c. Internal common equity when th^current market price of the common stock is S51. The expected dividend this coming year should be S3.40. increasing thereafter at an artftoal growth rate of 12 percent. The corporation's tax rate is 34 percent. d. A preferred stock paying a dividend of 11 percent on a SI 50 par value If a new issue is offered flotation costs wi be 13 percent of the current price of SI 78 e. A bond selling to yield 14 percent after flotation costs, but before adjusting for the marginal corporate tax rate of 34 percent In other words, 14 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows (principal and interest). a. What is the firm's after-tax cost of debt on the bond ?

Explanation / Answer

The after-tax cost of debt is the interest rate on the debt multiplied by (100% minus the incremental income tax rate).

a. First we have to find before tax cost, which is calculate as below:

floation cost = 5% * 1140 = 57

Bnp = (1000-57) = 943

I = 9% (Coupon Rate) * Par Value of 1000 = 9%*1000 = 90

M = 1000 (Par Value)

n = 13 (no of years)

Before Tax Cost = (I + (M-Bnp)/n)/M+0.6(Bnp-M)

Substituting all the values in above formula, you will get before tax cost of debt as 9.77%

Now After tax cost of debt is:

Before tax cost of debt * (1-Marginal Tax Rate) = 9.77%*(1-34%) = 6.45%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

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