Question

A firm is issuing new debt to finance some capital investment project. The firm will issue 20,000 new $1,000 face-value bonds that will mature in 20 years. The bonds have a coupon rate of 8% and are currently priced at par. The flotation costs that are associated with this new bond issue are expected to be $10 per bond. Further, the company has a marginal tax rate of 34%. Given this information, the before-tax cost of debt is _______________.

Answer 1

Answer:

8.09%

Explanation:

the coupon paid by each bond = $1,000 x 8% = $80

the net amount of money received from each bond = $990

n = 20

now we must find the yield to maturity:

YTM = {coupon + [(face value - market value)/n]} / [(face value + market value)/2]

YTM = {$80 + [($1,000 - $990)/20]} / [($1,000 + $990)/2] = $80.50 / $995 = 0.0809 = 8.09%