Dunder-Mifflin, Inc. (DMI) is selling 600,000 bonds to raise money for the publi

Question

Dunder-Mifflin, Inc. (DMI) is selling 600,000 bonds to raise money for the publication of new magazines in the coming year. The bonds will pay a coupon rate of

10.410.4% with semiannual payments and will mature in 30 years. Its par value is $100100. DMI hires an investment banker for the sale of the 600,000 bonds. The investment banker charges a fee of 33% on each bond sold. What is the cost of debt to DMI if the following are the proceeds before the banker's fees are deducted?

a.$47,682,000

b.$50,310,000

c.$73,998,000

d.$83,622,000

Explanation / Answer

10.4% 30 YEAR BOND OF 600,000 No of N=Bonds 600000 600000 600000 600000 One Bond 100 100 100 100 Semi Annual Interest Rate 5.2% 5.2% 5.2% 5.2% Flotation Cost 33% 33% 33% 33% Issue Value                                                               4,76,82,000                                                               5,03,10,000                                                               7,39,98,000                                                               8,36,22,000 n period 60 60 60 60 Paying interest 5.2 each six month 5.2 each six month 5.2 each six month 5.2 each six month Sale Price                                                                           79.47                                                                           83.85                                                                         123.33                                                                         139.37 Price after Flotation cost                                                                           53.24                                                                           56.18                                                                           82.63                                                                           93.38 Value of a bond 53.24=5.2*(PVIF,r%,60)+100*(PVIF,r%,60) 56.18=5.2*(PVIF,r%,60)+100*(PVIF,r%,60) 82.63=5.2*(PVIF,r%,60)+100*(PVIF,r%,60) 93.38=5.2*(PVIF,r%,60)+100*(PVIF,r%,60) Cost of Debt before tax r= 10.274% 9.753% 6.5350% 5.664% Working Note Disc factor Disc. Cash Flow Year 5.664% 1 5.2                                                                       0.94640                                                                              4.92 2 5.2                                                                       0.89567                                                                              4.66 3 5.2                                                                       0.84765                                                                              4.41 4 5.2                                                                       0.80222                                                                              4.17 5 5.2                                                                       0.75921                                                                              3.95 6 5.2                                                                       0.71852                                                                              3.74 7 5.2                                                                       0.68000                                                                              3.54 8 5.2                                                                       0.64355                                                                              3.35 9 5.2                                                                       0.60906                                                                              3.17 10 5.2                                                                       0.57641                                                                              3.00 11 5.2                                                                       0.54551                                                                              2.84 12 5.2                                                                       0.51627                                                                              2.68 13 5.2                                                                       0.48859                                                                              2.54 14 5.2                                                                       0.46240                                                                              2.40 15 5.2                                                                       0.43762                                                                              2.28 16 5.2                                                                       0.41416                                                                              2.15 17 5.2                                                                       0.39196                                                                              2.04 18 5.2                                                                       0.37095                                                                              1.93 19 5.2                                                                       0.35106                                                                              1.83 20 5.2                                                                       0.33225                                                                              1.73 21 5.2                                                                       0.31444                                                                              1.64 22 5.2                                                                       0.29758                                                                              1.55 23 5.2                                                                       0.28163                                                                              1.46 24 5.2                                                                       0.26653                                                                              1.39 25 5.2                                                                       0.25225                                                                              1.31 26 5.2                                                                       0.23872                                                                              1.24 27 5.2                                                                       0.22593                                                                              1.17 28 5.2                                                                       0.21382                                                                              1.11 29 5.2                                                                       0.20236                                                                              1.05 30 105.2                                                                       0.19151                                                                           20.15                                                                           93.38

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