Nico Trading Corporation is considering issuing longdashterm debt. The debt would have a 30dashyear maturity and a 10 percent co
upon rate. In order to sell the issue, the bonds must be underpriced at a discount of 5 percent of face value. In addition, the firm would have to pay flotation costs of 5 percent of face value. The firm's tax rate is 21 percent. Given this information, the afterdashtax cost of debt for Nico Trading would be
1 answer:
Answer:
After tax cost of debt is 8.82%
Explanation:
Given:
Assume coupon payments are made annually.
Face value (assumed) (FV) = $1,000
coupon rate = 10% or 0.1
Coupon payment (PMT) = $100
Maturity period (nper) = 30
Flotation cost = 0.05×1000 = $50
Discount = 0.05×1000 = $50
Price of debt = Face value - Discount - Flotation cost
= $1000 - 50 - 50
= $900
Calculate rate using spreadsheet function =rate(nper,pmt,PV,FV)
Rate or YTM(yield to maturity) is 11.17%
Tax rate = 21% or 0.21
After tax cost of debt = 0.1117 (1 - 0.21)
= 0.0882 or 8.82%
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